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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------TO ------------
COMMISSION FILE NO. 1-10397
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AMERIQUEST TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0244136
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
2465 MARYLAND ROAD 19090
WILLOW GROVE, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(215) 658-8900
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
TITLE OF EACH CLASS
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 21, 1999 is approximately $6,525,000. For purposes
of making this calculation only, the Registrant has defined "affiliates" as
including all officers, directors and beneficial owners of more than 10% of the
outstanding Common Stock of the Registrant.
There were 67,841,906 shares of the Registrant's Common Stock outstanding
as of December 21, 1999.
The following document is incorporated by reference into Part III, Items
10, 11, 12, and 13 of this Annual Report on Form 10-K: the registrant's
definitive proxy statement for its 2000 Annual Meeting of Stockholders to be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K.
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PART I
FOREWORD
THE INFORMATION SET FORTH IN THIS ANNUAL REPORT IS BASED PRIMARILY ON
HISTORICAL INFORMATION. THIS ANNUAL REPORT ALSO CONTAINS SOME FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE GROWTH PLANS AND OTHER MATTERS. TO THE EXTENT THAT
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS, SUCH STATEMENTS INVOLVE
UNCERTAINTY AND RISK, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. A LIST OF THOSE FACTORS WHICH
MANAGEMENT BELIEVES COULD ADVERSELY AFFECT THE ACTUAL RESULTS IS SET FORTH IN A
SECTION IMMEDIATELY FOLLOWING THE DESCRIPTION OF AMERIQUEST'S BUSINESS IN ITEM 1
UNDER THE CAPTION "SPECIAL FACTORS TO BE CONSIDERED."
ITEM 1. BUSINESS.
THE COMPANY
AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the
"Company"), markets and sells products and services providing business
information solutions for value-added resellers ("VARs") and systems
integrators. AmeriQuest's strategy is to emphasize the sale of complete
solutions for its clients and to provide a high level of value-added services,
including consultation on component selection, system assembly, configuration,
testing, logistics, start-up, installation and technical support services.
AmeriQuest markets, sells and supports a variety of products ranging from
individual components to complete systems that have been fully configured,
assembled and tested prior to delivery to the ultimate customer. AmeriQuest also
provides a variety of programs and seminars designed to enhance its clients'
technical, marketing, logistical and financial capabilities.
AmeriQuest currently markets and sells mid-range Unix and NT server
systems, networking systems, storage sub-systems, printers and related products
to VARs and systems integrators throughout the United States. Mid-range
computers and servers range in price from $5,000 to $800,000. AmeriQuest focuses
its marketing efforts on the products of a limited number of key vendors in
order to become one of the leading distributors for each of its principal
vendors. This enables AmeriQuest to develop product-specific technical expertise
that enhances its value-added support services. AmeriQuest attempts to minimize
competition among vendors' products while maintaining some overlap to provide
protection against product shortages or discontinuations.
AmeriQuest historically conducted its business through its subsidiaries,
but in April, 1997, AmeriQuest decided to focus its resources on building the
Advanced Systems Group in Pennsylvania and to close or sell all of the other
divisions. This reorganization was materially completed in November, 1997.
Following the reorganization, the Company became a more focused technical
distributor of services and computer products providing value added solutions
rather than a fulfillment distributor that relies on broad product lines and
high volumes of commodity products.
The Company maintains its principal executive offices at 2465 Maryland
Road, Willow Grove, Pennsylvania 19090, and its telephone number is (215)
658-8900.
CONTROL OF AMERIQUEST -- ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK
HOLDINGS BY SENIOR MANAGEMENT
On July 20, 1998, Listen Group Partners, LLC, a group headed by
AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO),
acquired the 36,349,878 shares of AmeriQuest Common Stock owned by Computer
2000, Inc., a wholly-owned subsidiary of Computer 2000 AG (collectively referred
to herein as "Computer 2000"), representing approximately 54% of total
outstanding shares of AmeriQuest Common Stock following the redemption of
certain Computer 2000 shares in connection with the transaction. The transaction
was approved by the outside directors and by the full Board of Directors of
AmeriQuest. In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest. The Board
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of Directors of the Company also agreed to reserve 6.7 million shares of Common
Stock for future issuance to AmeriQuest employees as incentive compensation
pursuant to terms to be approved by outside directors of the Board.
STRATEGY
The Company's current business focus is to increase the emphasis of
providing value-added services such as engineering design and system
configuration, installation capability, and marketing, financial and technical
support, to its VAR and systems integrator client base, which improves its
margins as compared to the margins of those distributors who provide for sale of
equipment only. In addition, AmeriQuest will continue second tier product
distribution in areas which minimize direct competition with the Company's
largest competitors and to concentrate on selling higher-margin mid-range
computer and client server systems, networking products and storage systems
along with complementary and related individual computer components, and
maintenance and leasing services. AmeriQuest has negotiated agreements with
several vendors that allow the Company to serve as the "silent partner" of the
Company's resellers by being able to sell products directly to the reseller's
end users when the reseller cannot do so itself or desires AmeriQuest to do so.
Although management believes that this strategy, when coupled with planned
increases in revenue, will return AmeriQuest to profitability, there are
numerous risks and uncertainties, including those described elsewhere in this
Annual Report, and no assurance can be given that the Company's strategy will
succeed or that the Company will become operationally profitable. Management
will periodically review the need to further reduce costs should sales for any
reason not materialize in amounts sufficient to cover the existing cost
structure.
PRODUCTS
AmeriQuest seeks to sell products from nationally-recognized vendors that
provide all the components most VARs and systems integrators require to fully
configure their business information solutions. The following is a description
of the major categories of products currently offered by AmeriQuest and the
principal vendors of those products:
CLIENT SERVERS AND PERSONAL COMPUTERS -- AmeriQuest offers a broad and
diverse group of server, notebook, and desktop products manufactured by
Acer, Compaq, Hewlett Packard, IBM and Unisys.
COMMUNICATIONS AND NETWORKS -- AmeriQuest provides local and wide area
network ("LAN/ WAN") certified engineering services, software and
specialized hardware products manufactured by 3Com, Cisco, D-Link, Digi
International, Hewlett Packard, IBM, Intel, Multi-Tech Systems and Nortel.
CAS, NAS AND SAN STORAGE -- AmeriQuest offers a broad line of channel
attached storage products, network attached storage products and storage
attached network products from IBM, SMS and Unisys.
PERIPHERALS AND SUPPLIES -- AmeriQuest distributes a broad line of
laser, ink-jet and dot matrix printers, monitors, terminals, stand-by power
supplies, accessories and supplies manufactured by numerous companies
including Acer, American Power, Citizen, Genicom, Hansol, Hewlett Packard,
Imation(3M), Lexmark, Okidata and Wyse.
OPERATING SYSTEM AND APPLICATION SOFTWARE -- AmeriQuest sells a
variety of operating systems and LAN software products generally as part of
its client server systems sales. AmeriQuest has also commenced the sale of
certain application software for Unix and mid-range systems. Among the
manufacturers of these software products are Citrix, IBM, including AIX and
Lotus Notes, Microsoft, Novell and SCO.
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SERVICES
AmeriQuest seeks to sell its services by providing all the elements most
VARs and systems integrators require to sell business information solutions.
Technical, marketing, logistical, and financial services are marketed and sold
as a part of the company's "Silent Partner"(TM) services. These services are
focused around Internet e-commerce solutions, high availability servers, and
thin client computing. The following is a description of the major categories of
services currently offered by AmeriQuest:
TECHNICAL SERVICES -- AmeriQuest provides Systems Engineering and
Integration Services to those clients who do not have the capability or
capacity to design, configure or install business information system
solutions with their own resources. AmeriQuest also provides an Open
Systems Technology Center in its Willow Grove, PA facility for its clients
to explore and test new technologies and various configurations and
applications.
MARKETING SERVICES -- AmeriQuest offers its VAR and systems integrator
clients a "virtual marketing department" to generate opportunities, plans
to sell services, and capability to provide Internet marketing tools.
LOGISTICAL SERVICES -- AmeriQuest offers logistical services to its
VAR and systems integrator clients by managing the entire scope of a
project from product selection, procurement and packaging to staging of
multiple ship point delivery and installation at its client's end-user.
FINANCIAL SERVICES -- AmeriQuest expands the financial capabilities of
its VAR and System Integrator clients by providing customer risk analysis;
bonding and insurance; financial and business planning assistance; and,
through its subsidiary, provides end-user leasing and technology upgrade
programs. AmeriQuest also arranges for leasing and maintenance options
offered by IBM, Hewlett Packard and Unisys for all products to clients and
ultimate customers. By arranging for multiple financing options, including
floor planning through a number of credit institutions, credit card
purchases and an "assignment of proceeds" program, AmeriQuest can assist
its clients in securing purchase orders in excess of what their normal
credit facilities would otherwise allow.
VENDOR RELATIONS
To maintain strong relationships with its principal vendors, AmeriQuest
focuses on marketing the products of a limited number of key vendors. AmeriQuest
selects its product lines to offer a total solution while minimizing competition
among vendors' products, but maintains overlap to provide protection against
product shortages or discontinuations. Accordingly, revenue from sale of
products of our five leading vendors; Acer , Hewlett Packard (supplied by
Pinacor), IBM (supplied by Pinacor), Okidata and Unisys, represented
approximately 21%, 21.4%, 8.2%, 14.6%, and 5%, respectively, of the Company's
revenue for the fiscal year ended September 30, 1999. The Company is focused on
increasing its share of business represented by each of Acer, HP, IBM and Unisys
and has made increases in its sales force to achieve such objective.
AmeriQuest expanded its relationship with Unisys during fiscal 1999 by
negotiating a corporate account reseller ("CAR") agreement which allows
AmeriQuest to sell Unisys products that are not available to its resellers,
directly to end users.
During 1999, AmeriQuest scaled back its direct relationship with IBM to
distribute IBM's networking products. The Company retained the right to sell IBM
mid-range products, including RS6000, networking products and mass storage.
AmeriQuest, like most hardware distributors, sells products throughout the
United States on behalf of its vendors on a nonexclusive basis without
geographic restriction. AmeriQuest has distribution agreements with most of its
vendors and believes they are in the form customarily used by each vendor and
generally contain provisions which allow termination by either party upon short
notice. Most of AmeriQuest's major distribution agreements provide price
protection by giving AmeriQuest a credit, subject to specified limitations, in
the amount of any price reductions by the vendor between the time of the initial
sale to AmeriQuest and the subsequent notice of price change to AmeriQuest. Most
of the major distribution agreements also give
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AmeriQuest qualified return privileges on slow-moving inventory. AmeriQuest's
distribution agreements do not restrict AmeriQuest from selling similar products
manufactured by competitors. Any minimum purchase provisions in AmeriQuest's
distribution agreements are at levels that AmeriQuest believes do not impose
significant risk that AmeriQuest will not be able to achieve such minimum
purchase requirements.
AmeriQuest has continued to pursue a strategy to reduce inventory of
non-core vendors and to satisfy its client's needs for non-core, supplemental or
complementary products by concentrating its procurement efforts with one or more
of the national fulfillment distributors.
From time-to-time, the demand for certain products sold by AmeriQuest
exceeds the supply available from the vendor. AmeriQuest believes that its
ability to compete has not been adversely affected to a material extent by these
periodic shortages, although sales may be adversely affected for an interim
period. In order to limit the impact of such shortages, AmeriQuest generally
attempts to include comparable products from more than one vendor in its product
line and to have arrangements with one or more of the large national fulfillment
distributors to purchase products in short supply.
SALES AND MARKETING
The Company sells to more than 1,700 computer resellers. The Company's
clients include VARs, corporate resellers, systems integrators, and consultants.
AmeriQuest estimates that a majority of its sales are to VARs and systems
integrators. The Company's smaller clients often do not have the resources to
establish a large number of direct purchasing relationships or to stock
significant product inventories. Consequently, they tend to purchase a high
percentage of their products from distributors. Larger resellers often establish
direct relationships with manufacturers for their more popular products, but
utilize distributors for slower-moving products and for fill-in orders of
fast-moving products which may not be available on a timely basis from
manufacturers. AmeriQuest has chosen to satisfy its client's needs for
supplemental and complementary products by concentrating the Company's
procurement efforts with one of the large, national fulfillment distributors. No
client has accounted for more than ten percent of AmeriQuest's net sales during
the 1999, 1998, or 1997 fiscal years. Sales by AmeriQuest are not seasonal to
any material extent.
Since the change in control in July, 1998, management of the Company has
been able to fill vacancies in the sales staff. During the cost and overhead
reduction period that lasted from April, 1997 to June of 1998, the sales force
had declined to 12 people. On February 1, 1999 a very experienced executive,
Michael J. McCarthy, was recruited to serve as the Vice President of Sales and
Marketing. Under his leadership, the sales staff has been increased to 25
currently, with training and selection of such staff oriented toward the market,
service and product focus earlier described.
Compensation for sales personnel is largely based on the gross profits
generated from sales. All of AmeriQuest's sales personnel receive technical
training and are responsible for developing new accounts and serving established
accounts. AmeriQuest places some emphasis on telemarketing, but most of the
Company's new sales personnel operate in the field.
OPERATIONS AND CUSTOMER SERVICES
Through the Company's business as a provider of services and quality
products for business information solutions, clients are offered a single source
of supply, prompt delivery, financing programs, engineering services, marketing
assistance, logistical support, customer leasing and maintenance and client
support.
CUSTOMER ORDER ENTRY. Client orders are generally made by a toll-free
telephone call with a sales representative in AmeriQuest's sales offices, and
the order is entered into AmeriQuest's computer system. The sales representative
has access to available information on inventory and client credit status and,
upon reviewing this data, can enter the order immediately. Shipment is usually
made the same day, except on orders that require assembly and testing or
purchase from a vendor. Clients may also pick up their orders at the designated
warehouse. All orders are handled on a prepayment, C.O.D. or credit basis
depending on the client's creditworthiness and previous payment history. In
addition, AmeriQuest assists some resellers in obtaining equipment financing
through leasing or third-party floor planning programs from Deutsche Financial
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Services, IBM Credit Corporation, AT&T Capital, Leasetech (Unisys), the FINOVA
Group, Inc. and Transamerica Inventory Finance. Because of AmeriQuest's prompt
delivery times, it does not generally maintain a substantial order backlog.
PROMPT DELIVERY. In most geographic areas serviced by the Company, orders
received by 5:00 p.m. local time are typically shipped the same day, provided
the required inventory is in stock. AmeriQuest typically delivers products
directly from its vendors, or its Willow Grove, Pennsylvania or Atlanta, Georgia
warehouses via United Parcel Service and other common carriers, with customers
in key commercial regions of the United States receiving orders within one to
two business days of shipment. AmeriQuest also will provide overnight air
handling if requested and paid for by the client. These services allow clients
to minimize inventory investment yet provide responsive service to their
customers. AmeriQuest is also able to provide a fulfillment service so that
orders are shipped directly to a client's customer, thereby reducing the need
for clients to maintain inventories of certain products.
CUSTOMER SUPPORT. The Company currently offers clients a single source for
competitively priced hardware and software products from numerous vendors. By
purchasing from the Company, the client only needs to comply with a single set
of ordering, billing and product return procedures. The Company also provides
training and product information to its clients.
AmeriQuest permits the return of products within certain time limits and
under certain conditions subject to a restocking charge, provided that the
products are unused. Products that are defective upon arrival are handled on a
manufacturers' warranty return basis without any restocking charge.
AmeriQuest offers its clients warranty return rights that reflect those
that are offered by each manufacturer's individual warranty program. This
pass-through of manufacturers' warranties is one of the value-added services
that AmeriQuest provides.
COMPETITION
Competition in the technical, as opposed to fulfillment only, distribution
of services and mid-range computer systems is limited, but intense. Principal
national distributors in the technical distribution of mid-range, Unix and NT
server systems, networking systems, storage sub-systems, printers and related
products with which the Company competes include Western Micro, Jones Business
Systems, and Westcon. Many of the technical distributors have greater financial
resources than the Company. Additionally it is reasonable to expect that the
large broad-line fulfillment distributors such as Ingram Micro Inc., Merisel,
Inc., Pinacor and Tech Data Corporation, which have substantially greater
financial resources than AmeriQuest, may enter the market in pursuit of the
greater gross profit margins of technical distribution.
Competition is primarily based upon availability of product, price,
technical support and other support services. AmeriQuest believes that it is
generally competitive with respect to each of these factors and that its
principal, competitive advantages are its personal sales relationships,
technical strengths and other support services offerrings, and speed and
accuracy of delivery.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software programs are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries, or be
otherwise modified, to distinguish 21st century dates from 20th century dates.
As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with such Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. To date, AmeriQuest has made an assessment of the Year
2000 readiness of mission critical third party software and hardware used by the
Company. The Company has taken steps to upgrade such software and hardware used
by the Company known to it not to be Year 2000 compliant or where the
manufacturer of such software or hardware has provided upgrades to the Company.
In addition, AmeriQuest has performed a Year 2000 simulation on all such
software and hardware. The Company has similarly tested
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all mission critical software and hardware with respect to leap year
calculations. The Company believes that, based on upgrades performed to date
and/or upgrades provided by the manufacturer, all mission critical software and
hardware used by the Company is either Year 2000 compliant or the Company has
taken steps to upgrade or replace such systems so that they are Year 2000
compliant.
Costs. To date, AmeriQuest has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Although the Company does
not anticipate that any such expenses incurred in the future will be material,
such expenses, if higher than anticipated, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Risks. Except where plans have been made to upgrade or replace software
and hardware that is not Year 2000 compliant, AmeriQuest is not currently aware
of any Year 2000 compliance problems relating to third party software, hardware
and services used by the Company that would have a material adverse effect on
the Company's business, results of operations or financial condition. There can
be no assurance that the Company will not discover Year 2000 compliance problems
in third party software, hardware and services used by the Company which will
need to be addressed or replaced, any of which could be time consuming and
expensive. The failure of the Company to identify, address and/or replace any
such third party software, hardware or services used by the Company on a timely
basis, if at all, that are not Year 2000 compliant could result in lost
revenues, increased operating costs and other business interruptions, any of
which could have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company has not ascertained the Year 2000 compliance of hardware or
software which may have been sold by the Company in the past. AmeriQuest is also
not currently aware of any specific Year 2000 compliance problems relating to
third party software and hardware currently sold by the Company to its clients
which is supplied to the Company by its vendors. The Year 2000 compliance of
software and hardware supplied to the Company by its vendors is outside the
Company's control. The Company makes available to its clients the warranties
offered by manufacturers whose products it sells. While the Company believes
that ultimate responsibility for claims arising from the Year 2000 compliance of
the software and hardware it sells should be borne by the products'
manufacturers, there can be no assurance that the Company will not have
liability for any such claims and any related liability could have a material
adverse effect on the Company's business, results of operations or financial
condition.
In addition, there can be no assurance that other third parties outside the
Company's control, including, without limitation, governmental agencies,
financial institutions, public utilities, other service providers with which the
Company does business and others, will be Year 2000 compliant. The failure of
any such entity to be Year 2000 compliant could result in systematic failures
beyond the control of the Company which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Contingency Plans. The Company has established a formal contingency plan
for dealing with a failure by the Company and its vendors or others to achieve
Year 2000 compliance.
EMPLOYEES
As of September 30, 1999, AmeriQuest had 75 full-time employees sales
(increased to 78 currently), including 21 persons employed in sales (23
currently), 10 persons employed in sales support (12 currently) and 5 persons
employed in marketing functions. None of AmeriQuest's employees are covered by a
collective bargaining agreement. AmeriQuest considers its relations with its
employees to be good.
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SPECIAL FACTORS TO BE CONSIDERED
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be carefully considered:
CONTINUED OPERATING LOSSES
While the Company had a loss of $1,909,000 during the fiscal year ended
September 30, 1999, the Company experienced significantly greater losses during
previous fiscal years other than fiscal 1998, and there is no assurance that the
Company will become profitable in the future. The Company had net income of
$747,000 during the fiscal year ended September 30, 1998, but such income
included a reversal of prior year restructuring accruals of $1,376,000.
Additionally, the Company recorded a significant benefit due to the reversal of
other previously established reserves. During the year ended September 30, 1997,
the Company had operating losses of $41.3 million which included restructuring,
asset impairment and relocation costs of $26.4 million associated with the close
down of the unprofitable distribution businesses. The Company recorded a net
loss of $33.6 million during fiscal 1996 (including lease termination and moving
costs of $6.4 million). The fiscal 1995 net loss of $67.6 million included the
write-off of approximately $23.8 million of intangible assets and the
liquidation of inventory associated with the termination of the Company's
entertainment software business. In addition, the fiscal 1995 loss included
costs associated with the integration of the significant acquisitions which took
place during that fiscal year.
Although the Company has significantly reduced its operating losses as a
result of the restructuring, in the event that operating losses were to continue
at significant levels, it is likely that the Company would need to raise
additional capital to cover those losses. There is no assurance that such
additional capital would be available, or if available, could be secured on
terms favorable to the Company.
MARKET CONSIDERATIONS
The price of the Company's Common Stock has been subject to significant
price fluctuations, and there can be no assurance that the price of the
Company's Common Stock will stabilize. In addition, the trading volume for the
Company's Common Stock has generally been relatively small. A large increase in
share trading volume in a short period of time could cause a significant change
in share trading prices.
NEED TO INCREASE SALES VOLUME
As a distributor, the Company has historically operated on small gross
margins. Further, the Company incurs operating expenses to maintain a sufficient
level of inventory, facilities, sales staff and support personnel necessary to
support sales of products. Although the Company continues to explore possible
cost reduction measures, it believes that further significant reductions in its
operating expenses will be difficult to achieve without also reducing the sales
volumes currently being generated from operations. As a result of these and
other factors, the Company must achieve substantially greater sales volumes at
satisfactory margins to achieve sustained operating profitability, and there can
be no assurance that this will happen. It has only been since the change in
control in mid-July of 1998, that management of the Company has been able to
fill vacancies in the sales staff. During the cost and overhead reduction period
that lasted from April, 1997 to June of 1998, the sales force had declined to 12
people. The staff has been increased to 23 currently with internal plans to
bring the level to 25.
In addition, the Company has begun a migration from exclusively being a
distributor of micro, mini- and mid-range computers and related products to also
selling value added services, such as engineering design and system
configuration, installation capability, marketing, financial and technical
support.
While the Company's management is attempting to increase sales and its
share of business represented by services and such manufacturers as Acer,
Hewlett Packard, IBM and Unisys, there can be no assurance that sales will
increase or that any increases will be of sufficient magnitude or will occur
soon enough to permit the Company to achieve profitability without additional
business or financial restructuring.
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NEED TO MAINTAIN VENDOR BASE
The Company principally provides computer products manufactured by Acer,
Hewlett Packard, IBM, Okidata and Unisys. Accordingly, the Company's
relationships with these and its other existing vendors are critical to its
ability to purchase on a favorable basis the products that it resells. In
addition, from time-to-time the Company may need to initiate relationships with
additional vendors without jeopardizing the Company's existing vendor
relationships. The Company is also dependent upon its vendors' willingness or
ability to make timely shipment of the products ordered by the Company. The
failure of vendors to make shipments on a timely basis could cause a material
disruption of the Company's sales. In the past, the Company has at times
experienced delays in its ability to fill client orders, due to the inability of
certain suppliers to meet their volume and schedule requirements and/or due to
the Company's shortage of cash resources. Delays in shipments from suppliers can
cause fluctuations in the Company's short-term results and contribute to order
cancellations.
RAPID CHANGES IN TECHNOLOGY AND MARKETS
The computer industry in general, and the specific markets in which the
Company competes, are characterized by rapidly changing technology, often
resulting in short product life cycles, rapid price declines, inventory
imbalances when compared with market demands, and significant shifts in market
dynamics. The Company believes its success is highly dependent upon its ability
to react to technological changes and shifts in market demand by continuing to
provide cost-competitive products that respond to current market needs. As a
value-added wholesale distributor, the Company is particularly vulnerable to
changes caused by technological innovation. The introduction of new products and
the phase out of old products requires the Company to carefully manage its
inventory to minimize inventory obsolescence. The Company has experienced
significant losses due to inventory obsolescence in the past and losses due to
selling products acquired as vendor surpluses. The Company believes it has
instituted the necessary inventory and purchasing safeguards to prevent these
difficulties in the future. Should the Company fail to provide new products on a
timely basis that respond to industry demands, the Company's operating results
would be adversely affected.
COMPETITION
The Company competes in an industry characterized by intense competition.
Principal national distributors in the technical distribution of mid-range, Unix
and NT server systems, networking systems, storage sub-systems, printers and
related products with which the Company competes include Western Micro, Jones
Business Systems, and Westcon, who have greater financial and technical
resources than the Company.. Additionally it is reasonable to expect that the
large broad-line distributors such as Ingram Micro Inc., Merisel, Inc. and Tech
Data Corporation, which have substantially greater financial resources than
AmeriQuest, may enter the market in pursuit of the greater gross profit margins
of technical distribution. Competition in the computer products distribution
industry is based primarily on price, product availability, and technical
support services provided, and to a lesser extent on speed of delivery,
convenience and the level of marketing. As technological changes occur, the
Company's products have had shorter and shorter product life cycles, and new
competing products are introduced by other vendors and resellers. Moreover, the
manner in which computer products are distributed and sold is changing, and new
methods of distribution and sale may emerge or expand. These factors, among
others, will likely cause continued competitive pressures on the Company in the
future.
MANAGEMENT FOCUS ON COMPLETION OF RESTRUCTURING AND CHANGE IN CONTROL
Because of the restructuring during Fiscal 1997 and 1998 and the managerial
disruption caused by the Computer 2000 merger with Tech Data and the related and
resultant change in control of AmeriQuest, the Company was unable until the end
of July, 1998 to focus management attention and marketing expenditures on
increasing its market share and returning the Company to recapturing and
sustaining the growth apparent in the market niche the Company has chosen.
During fiscal 1999 the Company completed its reorganization of the sales and
marketing function. If the Company's sales for any reason in the near future do
not materialize in
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<PAGE> 10
amounts sufficient to cover the existing cost structure, management may again
have to consider restructuring alternatives.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, product development and
operational personnel and the Company's ability to retain and continue to
attract highly skilled personnel. Competition for employees in the computer
industry is intense, and there can be no assurance that the Company will be able
to attract and retain qualified employees. The Company has previously made a
number of management changes, and has had substantial layoffs and other employee
departures. If the Company continues to experience financial difficulties, it
may become increasingly difficult for it to hire new employees and retain
current employees. The Company does not carry any key person life insurance with
respect to any of its personnel.
FORWARD-LOOKING INFORMATION
Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include worldwide
economic and political conditions, industry specific factors, the Company's
ability to maintain access to external financing sources, the Company's ability
to increase revenue, the Company's ability to manage expense levels, the
Company's ability to retain key vendors, the continued financial strength of the
Company's clients, and the Company's ability to accurately anticipate customer
demand and manage inventories.
This Annual Report on Form 10-K contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth above and elsewhere in
this Annual Report on Form 10-K, the inclusion of forward-looking information
herein should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. The Company
may encounter competitive, technological, financial, legal and business
challenges making it more difficult than expected to continue as a value-added
wholesale distributor; competitive conditions within the computer industry may
change adversely; demand for the products distributed by the Company may weaken;
the Company may be unable to retain existing key vendors and existing key
management personnel; inventory risks may rise due to shifts in market demand;
the Company's forecasts may not accurately anticipate market demand; and there
may be other material adverse changes in the Company's operations or business.
Certain important presumptions affecting the forward-looking statements made
herein include, but are not limited to, (i) timely identifying and delivering
new products as well as enhancing existing products and services, (ii)
identifying new clients, and marketing the Company's services and products to
those clients, (iii) maintaining good relationships with key vendors and (iv)
accurately forecasting cash needs. Assumptions relating to budgeting, marketing,
advertising, product mix and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing, cash expenditures or other budgets, which may in
turn affect the Company's financial position and results of operations.
ITEM 2. PROPERTIES.
AmeriQuest's principal offices are located in leased facilities in Willow
Grove, Pennsylvania, which consists of approximately 17,500 square feet of
office space and 25,000 square feet of warehouse space on a single level.
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<PAGE> 11
The following table sets forth information regarding the principal and
regional offices of AmeriQuest:
<TABLE>
<CAPTION>
SQUARE FEET LEASE EXPIRATION YEAR OPENED
----------- ---------------- -----------
<S> <C> <C> <C>
LOCATION
Willow Grove, PA........................ 42,500 8/31/03 1998
Atlanta, GA............................. 6,000 9/30/00 1997
Maple Shade, NJ......................... 1,400 8/31/00 1997
St. Louis, MO........................... 1,400 11/30/00 1997
SUBLEASED
Anaheim, CA............................. 62,298 2/29/00 1995
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI
Insurance Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts
due for the settlements were $920,000. At September 30, 1997, the Company had
reserves in excess of the settlement amounts of approximately $1.3 million,
which were taken into income during fiscal 1998 as an offset to selling, general
and administrative expense in the accompanying consolidated statement of
operations.
AmeriQuest is both a plaintiff and defendant from time-to-time in lawsuits
incidental to its business. AmeriQuest management believes that none of such
current proceedings individually, or in the aggregate, will have a material
adverse effect on AmeriQuest's financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of fiscal 1999.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the market prices for the shares of Common
Stock of AmeriQuest. The prices reflect the high and low closing prices quoted
on the New York Stock Exchange for each calendar quarter since September 30,
1997 through March 9, 1998, when the Company was de-listed. The prices reflect
the high and low closing prices reported on NASDAQ OTC Bulletin Board for each
calendar quarter since March 10, 1998.
AMERIQUEST
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997
Fourth Quarter.............................................. 5/16 7/32
1998
First Quarter............................................... 13/64 3/64
Second Quarter.............................................. 19/64 5/64
Third Quarter............................................... 15/64 5/64
Fourth Quarter.............................................. 1/8 1/16
1999
First Quarter............................................... 1/16 1/16
Second Quarter.............................................. 11/64 1/16
Third Quarter............................................... 1/8 5/64
Fourth Quarter.............................................. 1/4 5/64
</TABLE>
On December 21, 1999, the stock of AmeriQuest closed at 3/16 (or
approximately $0.19) per share. As of that date AmeriQuest had approximately
1,000 stockholders of record.
The Company did not declare any dividends on its Common Stock in 1999 and
does not intend to declare dividends on its Common Stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data has been derived from
and should be read in conjunction with the audited consolidated financial
statements of AmeriQuest, and the notes thereto, and with "Management's
Discussion and Analysis of Results of Operations and Financial Condition",
included elsewhere herein and incorporated herein by this reference (dollars in
thousands, except share data).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales................ $ 56,865 $ 60,466 $ 218,877 $ 424,708 $ 100,723
Net income (loss)........ (1,909)(1) 747(2) (41,311)(2) (33,609)(2) (7,041)
Net Income (loss) per
share.................. (0.03)(4) (0.01)(4) (0.63) (0.76) (0.30)
Total assets............. 14,168 12,955 26,079 116,372 115,531
Long-term obligations.... 0 0 0 3,122 6,686(3)
Stockholders' equity
(deficit).............. 7,169 9,018 (23,392) (11,206) 17,565
<CAPTION>
YEAR ENDED
JUNE 30,
1995
-------------
<S> <C>
Net sales................ $ 416,571
Net income (loss)........ (67,566)
Net Income (loss) per
share.................. (3.76)
Total assets............. 128,008
Long-term obligations.... 24,515
Stockholders' equity
(deficit).............. (25,709)
</TABLE>
- ---------------
(1) While the Company had net income of $747,000, such income included a
reversal of prior year restructuring accruals of $1,376,000. Additionally,
the Company recorded a significant benefit due to the reversal of other
previously established reserves (See Notes 3 5, 7 and 10 to Notes to
Consolidated Financial Statements).
(2) The losses in 1997 were due principally to restructuring, asset impairment
and relocation costs of $26.4 million associated with the close down of the
unprofitable distribution businesses. The losses in
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<PAGE> 13
1996 included lease termination costs and moving costs of $6.4 million. The
losses in 1995 were due principally to abandonment of U.S. software
operations and the cost of integrating prior acquisitions and the write-down
of assets.
(3) For the year ended June 30, 1995 includes the $18 million advance from
Computer 2000 related to its equity investment and $5.8 million associated
with the issuance of 6.8 million shares of the Company's common stock
required to complete a merger.
(4) Net income (loss) per share includes a deduction for dividends on Preferred
Stock to arrive at net income (loss) available to Common Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SIGNIFICANT EVENTS
On July 20, 1998, Listen Group Partners, LLC, a group headed by
AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO),
acquired the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest, in part to release Computer 2000 from its guarantee of
IBMCC, obtained the release of Computer 2000 and its affiliates from all other
guarantees of AmeriQuest obligations, and agreed to pay certain transaction
costs totaling approximately $220,000. As part of the transaction, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends, interest and
AmeriQuest options and warrants held by Computer 2000. As a result of the
transaction, the number of outstanding shares of AmeriQuest, on a fully diluted
basis, was reduced from approximately 118 million to approximately 67 million.
The Listen Group transaction completed a reorganization which began in
April, 1997.
On April 9, 1997, the Board approved a wide-ranging restructuring plan
encompassing head-count reductions and facility closures with the goal of
focusing on and strengthening the activities of its Advanced Systems Group
("ASG"), which had the highest gross margins of its distribution businesses, at
that time. The Company announced that projected losses for the year ending
September 30, 1997 could be in the range of approximately $45,000,000, partly as
the result of the planned restructuring. The restructuring measures were
necessitated by the fact that revenues for the quarter ended March 31, 1997 were
substantially below expectations, primarily due to the inability of the Company
to compete effectively in the standard distribution of computer products.
Management also continued the investigation of possible other dispositions.
On May 6, 1997, AmeriQuest issued 300,000 shares of its Series H Cumulative
Convertible Preferred Stock (convertible into 41,958,042 shares of AmeriQuest
Common Stock) -- to Computer 2000 Inc. in consideration of the payment by
Computer 2000 Inc. of $30,000,000. This infusion fulfilled a previously
announced commitment from Computer 2000 Inc. to make such an investment.
On June 19, 1997, CMS Enhancements Inc. sold substantially all of its
assets to CMS Peripherals Inc., a company formed by the former managing director
of CMS Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the
transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also
signed a non-competition agreement with CMS Peripherals with a term of five
years prohibiting use of the former name of the subsidiary and assembly or
manufacture of disk drives.
On September 30, 1997, Computer 2000 AG paid AmeriQuest's outstanding lines
of credit in the amount of $27.7 million (formerly guaranteed by Computer 2000
AG) and converted the loans to a non-interest bearing intercompany demand loan,
deferring demand of payment through September 30, 1998, but subordinated to the
Company's working capital lender.
On October 20, 1997, AmeriQuest/Kenfil Inc. sold its wholly-owned
subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong corporation and
Kenfil Distribution (M) Sdn. Bhd., a Malaysian
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<PAGE> 14
corporation, to Regentland Holdings Ltd. for proceeds of $2,939,062 pursuant to
a Stock Purchase Agreement. The purchase price was equivalent to repayment of a
loan and the net book value of the assets sold plus a premium of $450,000, and
was paid by issuance of a dividend from Kenfil Distribution (Far East) Limited
to AmeriQuest/Kenfil Inc. in the amount of $1,717,106, the loan repayment of
$771,956 from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc.,
and the payment of $450,000 from Regentland Holdings Ltd. Regentland Holdings
Ltd. was formed by Mr. Simon Yip, the former Chief Executive Officer of Kenfil
Distribution (Far East) Limited to accommodate his purchase of such entities.
ANNUAL OPERATING RESULTS
The following table presents the Company's yearly results of operations as
a percent of sales:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Sales.......................................... 100.0% 100.0% 100.0%
Gross Profit................................... 8.6 10.1 7.2
Selling, general and administrative............ 11.8 10.7 16.1
Intangible write-off........................... -- -- 4.1
Restructuring.................................. -- (2.3) 4.3
Interest....................................... 0.2 0.5 1.6
Net Income (Loss).............................. (3.4) 1.2 (18.9)
</TABLE>
NET SALES
During the fiscal year ended September 30, 1999 sales decreased 6% compared
to the twelve months ended September 30, 1998. However, included in sales for
fiscal 1998 were shipments to other IBM distributors of approximately $7,850,000
of IBM RS6000 product that represented liquidation of inventory that took place
as AmeriQuest exited the IBM two tier distributor program. Sales attributable to
the Company's ongoing business during fiscal 1998 were thus $52,616,000
representing an increase of 8%, or $4,249,000 over fiscal 1998. This increase
resulted from the Company's decision to focus on business information solution
selling during fiscal 1999.
During the fiscal year ended September 30, 1998 sales decreased 72%
compared to the twelve months ended September 30, 1997. Sales decreases were
mainly attributable to the Company's decision to focus on the activities of its
Advanced Systems Group in April of 1997 and sell or close all other divisions
during the preceding fiscal year. Sales attributable to the Company's ongoing
business during fiscal 1997 were $52,050,000. Accordingly, sales during the year
ended September 30, 1998, as adjusted, increased by 1% over the prior year
despite both the Company's decision to terminate its 2nd tier IBM distribution
of Unix products, and its inability to hire and replace sales staff or recruit
additional resellers until the period following the change in control to the
senior management of the Company.
The Company has relationships with several key vendors as primary suppliers
of computer products to the Company. For the years ended September 30, 1999,
1998 and 1997, sales derived from products from three, two and two vendors
accounted for 65%, 54% and 23%, respectively, of the Company's sales.
COST OF SALES AND GROSS PROFIT
Cost of sales includes primarily the cost of merchandise, freight expenses
and provisions for inventory losses and is reduced by vendor volume rebates and
other items. Gross profit (sales less cost of sales) decreased to 8.6% of sales
for the fiscal year ended September 30, 1999 compared to 10.1% for the fiscal
year ended September 30, 1998. The desired transition of the Company's sales
force towards "solution" and services selling with its higher margins, while
beginning to show quarterly improvement, has not yet increased sufficiently to
offset either the lower margins of increasing revenue of low-end server, desktop
and peripheral products or the loss of the margin associated with the IBM 2nd
tier RS6000 program in the first half of fiscal
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<PAGE> 15
1998. In addition, the Company recorded in fiscal 1999 and 1998 cost of sales
benefits of approximately $400,000 related to reversal of certain previously
established cost of sales reserves.
Gross profit increased to 10.1% of sales for the fiscal year ended
September 30, 1998 compared to 7.2% for the fiscal year ended September 30,
1997. The improvement was primarily attributable to the closing of the lower
margin standard distribution businesses and continuation of the higher margin
Advanced Systems division revenue and related higher margin. The detrimental
effect on gross profit of approximately $1,300,000 caused by the liquidation of
inventory purchased in fiscal 1998 was offset by favorable settlements of
approximately $1,300,000 of previously established vendor debit loss reserves.
In addition, in fiscal 1998 the Company recorded a benefit of approximately
$380,000 related to previously established other cost of sales accruals.
The Company receives funds under incentive programs based upon volume sales
or purchase of the vendors products. The incentive funds reduce the cost of the
products sold. Incentive programs resulted in $0.5 million, $0.3 million and
$2.4 million for the years ended September 30, 1999, September 30, 1998 and
September 30, 1997, respectively.
AmeriQuest anticipates that it will continue to experience pressure on
gross selling margins of open source hardware product revenues due to severe
industry competition. Although AmeriQuest expects that it will be able to
improve sales product mix toward those products and services generating higher
margins and reduce operating expenses as a percent of sales, no assurance can be
given as to whether such improvement in fact will occur or as to the actual
amount of any such improvement. To the extent gross margins decline and the
Company is not successful in reducing selling, general and administrative
expenses as a percentage of sales, the Company will continue to experience
negative operating results.
OPERATING EXPENSES
For the fiscal years ended September 30, 1999, 1998 and 1997, operating
expenses, exclusive of restructuring and the write-off of intangibles were
approximately 11.8%, 10.7%, and 16.1% of sales, respectively. Selling, general
and administrative expenses increased during fiscal 1999 as the Company expanded
and rebuilt its sales force with a focus on consultative selling and providing
services and quality products for business information solutions to VARs and
systems integrators. In addition, the Company recorded a benefit of
approximately $600,000 in fiscal 1999 resulting from the reversal of previously
established accruals. AmeriQuest's strategy is to emphasize the sale of complete
solutions for its clients and to provide a high level of value-added services,
including consultation on component selection, system assembly, configuration,
testing and technical support services.
During the year ended September 30, 1998, the Company settled two lawsuits
favorably and reversed $1.3 million of reserves in excess of settlement amounts
which served to offset certain general and administrative costs incurred during
the fiscal year that related to the withdrawal from business with certain
clients and vendors and residual expenses resulting from closing of the
Company's other divisions in fiscal 1997 and 1998. The Company also recorded the
benefit of approximately $400,000 in fiscal 1998 resulting from the reversal of
previously established accruals. Operating expenses also declined during fiscal
1998, compared to fiscal 1997, as a result of the closing of the lower margin
standard distribution businesses.
During the year ended September 30, 1997, the Company incurred significant
operating and personnel costs to close down the unprofitable distribution
businesses. During the 1997 fiscal year the Company recorded a $9.3 million
charge to expense the restructuring of the Company's sales and administrative
staffing and planned closing of rented facilities.
Operating expenses are reduced by advertising revenues and market
development funds received from vendors as subsidy for or incentive to market
their products. Funds received during the fiscal years ended September 30, 1999,
September 30, 1998 and September 30, 1997 totaled $0.3 million, $0.6 million and
$2.0 million, respectively.
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<PAGE> 16
INTANGIBLE WRITE-OFF
During the year ended September 30, 1997, the Company recorded an
intangible write-off of approximately $9 million (See Note 4 to Notes to
Consolidated Financial Statements).
RESTRUCTURING
During the year ended September 30, 1998, the company completed its
restructuring plan. Costs incurred to complete the restructuring plan were
charged against the related, previously established restructuring accruals.
Certain estimates made of the costs to complete the restructuring plan exceeded
the actual costs incurred. When the Company determined that the estimated costs
exceeded the actual costs, the remaining accruals were reversed into income.
During the year ended September 30, 1998, the Company reversed approximately
$1.4 million into income (See Note 3 to Notes to Consolidated Financial
Statements). During the year ended September 30, 1997, the company recorded a
restructuring cost of approximately $9.3 million.
INTEREST EXPENSE
Interest expense, net, decreased from $0.3 million for the year ended
September 30, 1998 to $0.1 million for the year ended September 30, 1999 due to
the elimination of debt associated with the change in control on July 20, 1998.
Borrowings on the bank credit line did not occur until April, 1999 as revenue
increases were achieved.
Net interest expense decreased from $3.5 million for the year ended
September 30, 1997 to $0.3 million for the year ended September 30, 1998 due to
(i) replacement of bank loans by intercompany loans from Computer 2000 without
interest and (ii) the equity infusion of $3,000,000 from Computer 2000 on July
20, 1998. See "Liquidity and Capital Resources".
INCOME TAXES
In the period October 1, 1996 to September 30, 1999, no income tax expense
was recorded due to losses or the availability of tax-loss carryforwards. Due to
the acquisition by Listen Group Partners, LLC of the Company's stock held by
Computer 2000 (see Note 2 to the Notes to Consolidated Financial Statements),
there was a change in ownership as defined by section 382 of the Internal
Revenue Code ("Section 382 Limitations"). The Section 382 Limitations limits the
Company's ability to utilize its net operating loss carryforwards created prior
to the ownership change. The Company has calculated that the net operating loss
carryforwards available to offset future taxable income is $17.4 million (see
Note 9 to the Notes to Consolidated Financial Statements). The Company had not
benefited from these net operating carryforwards as of September 30, 1999.
OPERATING INCOME VARIABILITY
The annual and quarterly operating results of the domestic operations of
the Company have varied considerably due to the acquisition of distribution
companies, closure and sale of certain subsidiaries and operating units and a
reduced emphasis on manufacturing and assembly for all but mass storage assembly
products, which also ceased as of June 19, 1997. As earlier mentioned, the
Company experienced a net loss of $67.6 million in fiscal 1995, a net loss of
$33.6 million during fiscal 1996, a net loss of $41.3 million during fiscal
1997, net income of $0.7 million during fiscal 1998 and a net loss of $1.9
million during fiscal 1999. Included in the net income for fiscal 1998 is
reversal of restructuring accruals of $1.4 million and other previously
established reserves.
INFLATION
To date AmeriQuest has not been significantly affected by inflation.
Moreover, technological changes in the electronics industry have generally
resulted in price reductions, despite increases in certain costs which may be
affected by inflation.
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<PAGE> 17
SEASONALITY
Generally, the Company's sales volumes are not seasonal between quarters,
although historical monthly sales within various quarters have varied
considerably. For example, sales tend to decrease in November, primarily due to
industry attendance at Comdex, with a corresponding increase in December.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $0.7 million in cash and had
borrowed $2.4 million against its line of credit. The Company used $2.5 million
in cash during the year ended September 30, 1999 primarily to finance capital
expenditures and the growth in sales and related accounts receivable.
At September 30, 1998, the Company had $0.7 million in cash and had not
borrowed against its line of credit. The Company used $7.0 million in cash from
operating activities during the year ended September 30, 1998 primarily to
finance expenditures associated with the restructuring charges provided in
fiscal 1997, offset partially by reduction in inventory levels.
At September 30, 1997, the Company had borrowed $3.1 million against lines
of credit. The Company generated $21.7 million in cash from operating activities
during the year ended September 30, 1997. Cash generated by operations in fiscal
1997 resulted primarily from collection of accounts receivable and liquidation
of inventory offset by full settlement of payment with discontinued vendors.
Sale of assets during fiscal 1997 generated an additional $3.5 million of cash.
Cash receipts were applied to reduce outstanding obligations under lines of
credit during fiscal 1997.
Accounts receivable days increased slightly during fiscal 1999 compared to
fiscal 1998 and decreased during fiscal 1998 compared to fiscal 1997,
representing shorter payment terms extended to clients. Inventory turnover
increased in fiscal years 1999, 1998 and 1997, reflecting an intentional
reduction in stock carried in an effort to reduce obsolescence costs and
carrying costs necessary to support the restructured business.
At September 30, 1999, the Company had a stockholders' equity of $7.2
million compared to September 30, 1998 stockholders' equity of $9.0 million. At
September 30, 1997, the Company had a stockholders' deficit of $23.4 million.
The improvement in stockholder's equity at September 30, 1998 resulted primarily
from the recapitalization associated with the change in control on July 20,
1998.
The Company had maintained bank lines of credit guaranteed by Computer 2000
with four German banks which totaled $27.7 million of borrowings at September
30, 1997. On September 30, 1997, Computer 2000 AG paid the outstanding bank
lines of credit and converted the loans to a $27.7 million non-interest bearing
intercompany demand loan, and agreed to defer demand of payment through
September 30, 1998 and subordinate its loan to the working capital lender. See
"Certain Relationships and Related Transactions." Notwithstanding the agreement
by Computer 2000 to defer demand of payment of the loan prior to September 30,
1998, certain specified events such as, but not limited to, the merger, sale or
reorganization of the Company would have made the loan immediately due and
payable. The intercompany loan was contributed to capital as a result of the
change in control on July 20, 1998.
The Company maintains a $10 million line of credit with Fleet Financial
("Fleet") which is secured by substantially all of the Company's assets.
Interest rates on the Fleet line are prime plus 150 basis points or libor plus
400 basis points. Borrowings under the Fleet line of credit are limited to a
contractual percentage of eligible inventories and receivables. The terms of the
line include restrictive covenants which require the maintenance of specific
levels of tangible net worth and cash flows. The Fleet line expires July 20,
2001. Borrowings under the Fleet line of credit at September 30, 1999 and
September 30, 1998 were $2,443,000 and $0 respectively. The Fleet line replaced
a line of credit with IBM Credit Corporation ("IBMCC"). Borrowings under the
IBMCC line of credit at September 30, 1997 totaled $3.1 million.
On December 22, 1999, the Company amended its Fleet facility. The amendment
waived defaults of the minimum tangible net worth and minimum cash flow
covenants, as defined, as of September 30, 1999 and reset certain financial
covenants effective October 1, 1999.
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<PAGE> 18
Management believes that the Company's existing capital resources and other
alternative sources of financing are adequate to meet its current operating
requirements through September 30, 2000 and beyond. Management believes the
Company's operating performance will meet the reset financial covenants under
the Fleet facility during fiscal 2000. Although management believes that the
Company's strategy, when coupled with planned increases in revenue, will return
AmeriQuest to profitability, there are numerous risks and uncertainties,
including those described elsewhere in this Annual Report, and no assurance can
be given that the Company's strategy will succeed or that the Company will
become operationally profitable. Management will periodically review the need to
further reduce costs should sales for any reason not materialize in amounts
sufficient to cover the existing cost structure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates. Pursuant to the
Company's line of credit with Fleet, a change in either the lender's base rate
or LIBOR would affect the rate at which the Company could borrow funds
thereunder. The Company believes that the effect of any such change would be
minimal. Management estimates that had either the lenders base rate or Libor
increased by one percent, the Company's interest expense for the year ended
September 30, 1999 would have increased by approximately $6,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes thereto, and the report of independent
public accountants thereon are included herein. Supplementary data, including
quarterly financial information, is included following the financial statements.
A list of the information so included is set forth in response to Item 14(a)
entitled "Exhibits, Financial Statement Schedules, and Reports on Form 8-K,"
which is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See "Election of Directors" in the proxy statement for the 1999 annual
meeting of the stockholders of the Company, which will be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Officers Compensation" in the proxy statement for the 1999
annual meeting of the stockholders of the Company, which will be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form
10-K and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See "Stock Ownership" in the proxy statement for the 1999 annual meeting of
the stockholders of the Company, which will be filed within 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Other Information -- Certain Relationships and Related Transactions"
in the proxy statement for the 1999 annual meeting of the stockholders of the
Company, which will be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K and is incorporated herein by
reference.
-19-
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C> <C>
(1) Financial Statements included in Part II of this Report:
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-7
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and
Reserve..................................................... F-16
</TABLE>
(b) Reports on Form 8-K
None
(c) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE OF DOCUMENT LOCATION OF FILING
- ------- ----------------- ------------------
<C> <S> <C>
3.01* Restated Certificate of Incorporation of
AmeriQuest...................................... SEC File No. 1-10397
Exhibit 3.01
10-K for September 30, 1998
3.02* By-laws of AmeriQuest........................... SEC File No. 33-81726
4.01* Reference is made to Exhibits 3.01 and 3.02, the
Certificate of Incorporation and By-laws, which
define the rights of security holders...........
4.02* Specimen Stock Certificate...................... SEC File No. 33-81726
10.01* Inventory and Working Capital Financing
Agreement dated July 20, 1998 by and between
AmeriQuest and Fleet Capital.................... SEC File No. 1-10397
8-K for July 30, 1998
10.02* 1996 Equity Incentive Plan...................... SEC File No. 1-10397
Exhibit 10.07
10-K for September 30, 1997
10.03* Employment Agreement for Alexander C. Kramer,
Jr.............................................. SEC File No. 1-10397
Exhibit 10.10
10-K for September 30, 1997
</TABLE>
-20-
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE OF DOCUMENT LOCATION OF FILING
- ------- ----------------- ------------------
<C> <S> <C>
10.04* Employment Agreement for Jon D. Jensen.......... SEC File No. 1-10397
Exhibit 10.11
10-K for September 30, 1997
10.05 Employment Agreement for Michael J. McCarthy....
10.06* Lease Agreement dated July 1, 1998 by and
between AmeriQuest and Merion Mills
Associates...................................... SEC File No. 1-10397
Exhibit 10.05
10-K for September 30, 1998
10.07* Lease Agreement dated January 25, 1995, as
amended, by and between AmeriQuest and Anaheim
Technology Center............................... SEC File No. 1-10397
Exhibit 10.25
10-K for September 30, 1996
10.08* Sublease dated as of September 4, 1996 by and
between AmeriQuest and Central Video, Inc....... SEC File No. 1-10397
Exhibit 10.26
10-K for September 30, 1996
10.09 1998 Equity Incentive Plan......................
21.01 Subsidiaries of AmeriQuest......................
27.01 Financial Data Schedule (for SEC use only)......
</TABLE>
- ---------------
* Incorporated herein by reference to the indicated filing pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended, and Rule 24 of
the Commission's Rules of Practice.
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1933, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Willow
Grove, State of Pennsylvania, on the 22nd day of December, 1999.
AmeriQuest Technologies, Inc.
/s/ ALEXANDER C. KRAMER
--------------------------------------
By: Alexander C. Kramer
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Each Person, in so signing, also causes and appoints Alexander C. Kramer
and Jon D. Jensen, and each of them acting alone, as his true and lawful
attorney-in-fact, in his name, place and stead, to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALEXANDER C. KRAMER President and a Director December 22, 1999
- --------------------------------------------------- (Principal Executive
Alexander C. Kramer Officer)
/s/ JON D. JENSEN Chief Financial Officer, December 22, 1999
- --------------------------------------------------- Chief Operating Officer,
Jon D. Jensen Secretary and a Director
(Principal Financial and
Accounting Officer)
/s/ EDWARD B. CLOUES, II Director December 22, 1999
- ---------------------------------------------------
Edward B. Cloues, II
/s/ WALTER A. REIMANN Director December 22, 1999
- ---------------------------------------------------
Walter A. Reimann
/s/ CHARLES W. SOLTIS Director December 22, 1999
- ---------------------------------------------------
Charles W. Soltis
</TABLE>
-22-
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AmeriQuest Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriQuest
Technologies, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriQuest Technologies,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania,
November 23, 1999 (except with
respect to matters discussed
in Note 8, as to which the
date is December 22, 1999).
F-1
<PAGE> 24
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 667 $ 755
Accounts receivable, net of allowances for doubtful
accounts of $264 and $609.............................. 8,323 6,535
Inventories............................................... 3,565 4,191
Other current assets...................................... 319 354
--------- ---------
Total current assets.............................. 12,874 11,835
PROPERTY AND EQUIPMENT, NET................................. 961 799
OTHER ASSETS................................................ 333 321
--------- ---------
$ 14,168 $ 12,955
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit............................................ $ 2,443 $
Accounts payable.......................................... 3,709 2,132
Accrued expenses and other................................ 847 1,805
--------- ---------
Total current liabilities......................... 6,999 3,937
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 200,000,000 shares
authorized; 67,841,906 and 66,881,906 shares issued and
outstanding, respectively.............................. 679 669
Additional paid-in capital................................ 174,433 174,383
Accumulated deficit....................................... (167,943) (166,034)
--------- ---------
Total stockholders' equity........................ 7,169 9,018
--------- ---------
$ 14,168 $ 12,955
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 25
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES................................................... $56,865 $60,466 $218,877
COST OF SALES............................................... 51,990 54,323 203,199
------- ------- --------
Gross profit........................................... 4,875 6,143 15,678
OPERATING EXPENSES
Selling, general and administrative....................... 6,693 6,499 35,160
Intangibles write-off..................................... -- -- 9,036
Restructuring costs....................................... -- (1,376) 9,338
------- ------- --------
Income (loss) from operations........................ (1,818) 1,020 (37,856)
INTEREST EXPENSE, NET....................................... 91 273 3,455
------- ------- --------
NET INCOME (LOSS)........................................... (1,909) 747 (41,311)
DIVIDENDS ON PREFERRED STOCK................................ -- (1,575) (875)
------- ------- --------
NET LOSS TO COMMON STOCKHOLDERS............................. $(1,909) $ (828) $(42,186)
======= ======= ========
BASIC AND DILUTED NET LOSS PER SHARE........................ $ (0.03) $ (0.01) $ (0.63)
======= ======= ========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
SHARE..................................................... 67,329 66,882 66,882
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 26
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1996............. -- $ -- 67,047,392 $670 $111,144 $(123,020) $(11,206)
Correction of outstanding shares that were
authorized but never issued in connection
with settlement of debt (1)................ -- -- (165,486) (1) 1 -- 0
Sale of preferred stock.................... 300,000 30,000 -- -- -- -- 30,000
Accrued dividend on preferred stock........ -- -- -- -- -- (875) (875)
Net loss................................... -- -- -- -- -- (41,311) (41,311)
-------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1997............. 300,000 30,000 66,881,906 669 111,145 (165,206) (23,392)
Accrued dividend on preferred stock........ -- -- -- -- -- (1,575) (1,575)
Contribution of cash, preferred stock,
accrued dividends and debt by Computer
2000 (see Note 2)........................ (300,000) (30,000) -- -- 63,238 -- 33,238
Net income................................. -- -- -- -- -- 747 747
-------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1998............. -- -- 66,881,906 669 174,383 (166,034) 9,018
Issuance of shares to executive
management............................... -- -- 960,000 10 50 -- 60
Net loss................................... -- -- -- -- -- (1,909) (1,909)
-------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1999............. -- $ -- 67,841,906 $679 $174,433 $(167,943) $ 7,169
======== ======== ========== ==== ======== ========= ========
</TABLE>
- ---------------
(1) Correction of Outstanding Shares -- The number of outstanding shares of
Common Stock was corrected to account for shares that were authorized but
never issued in connection with settlement of debt, and the elimination of
duplicate shares erroneously issued upon exercise of an employee stock
option.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 27
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,909) $ 747 $(41,311)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 301 307 2,664
Gain on sale of division assets........................ -- (184) (385)
Restructuring costs.................................... -- (1,376) 13,849
Changes in operating assets and liabilities:
Net (increase) decrease in accounts receivable......... (1,788) (415) 43,625
Decrease in inventories................................ 626 2,450 29,613
Decrease in other assets............................... 23 229 2,704
Increase (decrease) in accounts payable and accrued
expenses and other................................... 679 (8,757) (29,027)
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (2,068) (6,999) 21,732
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of division assets..................... -- 450 3,550
Capital expenditures, net of disposals.................... (463) (312) (62)
------- ------- --------
Net cash provided by (used in) investing
activities...................................... (463) 138 3,488
------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit......... 2,443 (3,064) (77,504)
Net borrowings from Computer 2000......................... -- -- 27,664
Contribution to capital from Computer 2000................ -- 3,000 --
Proceeds from sale of preferred and common stock.......... -- -- 30,000
------- ------- --------
Net cash provided by (used in) financing
activities...................................... 2,443 (64) (19,840)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (88) (6,925) 5,380
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 755 7,680 2,300
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 667 $ 755 $ 7,680
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 28
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS)
Interest: During the fiscal years ended September 30, 1999,
September 30, 1998 and September 30, 1997, the
Company paid cash for interest of approximately
$128, $499, and $3,614, respectively.
Income taxes: During the fiscal years ended September 30, 1999,
September 30, 1998 and September 30, 1997, the
Company made no income tax payments.
Noncash investing and financing activities:
Contribution of
non-interest Bearing demand
loan and Preferred stock
to capital: During the fiscal year ended September 30, 1998,
Computer 2000 contributed to the capital of the
Company a non-interest bearing demand loan due
Computer 2000 and preferred stock of approximately
$28 million and $30 million, respectively.
Dividends on Preferred
Stock: During the fiscal years ended September 30, 1998
and 1997, the Company had accrued $1,575 and $875,
respectively, in dividends payable to preferred
stockholders. The accrued dividends of $2,450 were
contributed to capital on July 20, 1998.
Issuance of Common Stock: During the fiscal year ended September 30, 1999,
the Company issued 960,000 shares of its common
stock to certain members of executive management as
settlement for bonuses accrued for at September 30,
1998.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 29
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business. AmeriQuest Technologies, Inc. and subsidiaries
(the "Company" or "AmeriQuest"), a Delaware corporation, is a provider of
products and services for business information solutions to value-added
resellers ("VARs") and systems integrators.
During fiscal 1998, the Company's senior management acquired all of the
Company's common stock held by Computer 2000, the then current majority
stockholder. Computer 2000 also contributed cash, preferred stock, accrued
dividends and obligations due Computer 2000 to the Company's equity (see Note
2).
Restructuring Costs. On April 9, 1997, the Board approved a wide-ranging
restructuring plan with the goal of focusing on the Company's Advanced Systems
Group ("ASG"). The plan included closure of all warehouse facilities, other than
ASG, which is based in Horsham, Pennsylvania. The restructuring has resulted in
the closure of warehouse facilities in Visalia, California, Miami, Florida,
Dallas, Texas, and Chicago, Illinois. In addition, the number of employees has
been significantly reduced and all remaining employees are in the US. The
Company also closed its corporate headquarters in Florida. The restructuring
plan was implemented, but not completed, throughout fiscal year 1997. At
September 30, 1997, the Company has accrued $3,738,000 of cost related to the
restructuring plan. The plan resulted in a substantial reduction in sales
revenue with the goal of returning the Company to profitability in future years.
Sales, for the year ended September 30, 1997, of the businesses closed were
approximately $126 million.
The Company completed this restructuring plan during fiscal year 1998.
Costs incurred to complete the restructuring plan were charged against the
related restructuring accruals. Certain estimates made of the costs to complete
the restructuring plan exceeded the actual costs incurred. When the Company
determined that the estimated costs exceeded the actual costs, the remaining
accruals were reversed into income. During fiscal 1998, the Company reversed
$1,376,000 into income, which is recorded in restructuring costs in the
accompanying consolidated statement of operations (see Note 3). In addition,
during 1998 and 1999, the Company recorded significant benefits to its
Statements of Operations due to the reversal of previously established reserves
(See Notes 3, 5, 7 and 10).
Basis of Presentation. The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. Through
September 30, 1997, The Company incurred significant losses. In fiscal 1998 and
1999, excluding the reversal of previously established reserves (See Notes 3, 5,
7 and 10), the Company continued to incur losses. In addition, the Company
generated negative cash flow from operations in fiscal 1998 and 1999,
respectively. As of September 30, 1999, the Company was not in compliance with
its bank line of credit. Such non-compliance was waived by the bank and new
covenants were established effective October 1, 1999 (see Note 8). Management
believes the Company's operating performance will meet these covenants during
fiscal 2000. Following the change of ownership to the Company's senior
management in fiscal 1998, management continued to focus on reducing working
capital requirements and monitoring overall cost control programs. In addition,
the Company has begun a migration from exclusively being a distributor of micro,
mini- and mid-range computers and related products to also selling value added
services, such as engineering design and system configuration, installation
capability, marketing, financial and technical support. Management believes the
Company's existing capital resources and other alternative sources of financing
will be adequate to fund the Company's operations throughout fiscal 2000 and
beyond. If necessary, management believes it has the ability to reduce operating
expenses so the Company will have adequate cash flow to sustain operations. The
Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, the Company's historical operating losses, the competitive
market for computers and computer related equipment, dependence on key vendors,
dependence on key personnel and risks associated with rapidly changing
technology and markets.
F-7
<PAGE> 30
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Basis of Consolidation. The consolidated financial statements include the
accounts of AmeriQuest and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Reclassifications: Certain amounts in the prior periods have been
reclassified to conform to the current year's presentation.
Cash and Cash Equivalents. The Company considers cash on deposit with
financial institutions and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
generally limits its investments in cash equivalents to certificates of deposit.
Inventories. Inventories consist principally of computer hardware and
software held for resale and are stated at the lower of first-in, first-out or
market. Reserves for inventory obsolescence and slow moving product are provided
based upon specified criteria, such as recent sales activity and date of
purchase. Amounts due from vendors for price protection and stock rotations are
recorded as an offset to the amounts due vendors in accounts payable. Management
assesses the realizable value of these amounts and reserves for potential
uncollectable balances.
Property and equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using straight-line method over
estimated useful lives as follows:
<TABLE>
<S> <C>
Equipment................................................... 5 to 7 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Lease term
Computer Hardware and Software.............................. 3 years
Vehicles.................................................... 3 to 5 years
</TABLE>
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is included
in operations.
Market development funds and volume incentive rebates. In general, vendors
provide various incentive programs to the Company. The funds received under
these programs are determined based on purchases and/ or sales of the vendors'
product and the performance of certain training, advertising and other market
development activities. Revenue associated with these funds is recorded when
earned either as a reduction of selling, general and administrative expenses or
product cost, according to the specific nature of the program.
Sales recognition. Sales are recorded as of the date shipments are made to
customers. Sales returns and allowances are reflected as a reduction in sales
and recorded in inventory at expected net realizable value. The Company permits
the return of products within certain time limits and will exchange returned
products. Products that are defective upon arrival are handled on a warranty
return basis with the Company's vendors. The Company provides for product
warranty and return obligations at the point of sale based on estimates of
expected future costs.
Income taxes. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109),
which requires an asset and liability approach in accounting for income taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of
F-8
<PAGE> 31
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
enacted laws. Additionally, SFAS 109 requires that deferred tax assets be
evaluated and a valuation allowance be established if it is "more likely than
not" that all or a portion of the deferred tax asset will not be realized.
Net loss per common share and common share equivalent. The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
effective the year ended September 30, 1998. This statement requires the
disclosure of both basic and diluted earnings per share as well as the
retroactive restatement of prior years' per share disclosures. Basic and
dilutive shares outstanding for the fiscal years ended September 30, 1999, 1998
and 1997 are the same, as all common stock equivalents are anti-dilutive due to
the loss to common shareholders.
Recently issued accounting pronouncements. The Company adopted FASB
Statement No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes additional standards for
segment reporting in the financial statements and is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 did not have an
effect on the Company's financial statements.
Concentration of credit risks. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
and accounts receivable. The Company places its cash with high credit quality
financial institutions. Concentrations of credit risk with respect to accounts
receivable are not significant due to the large number of clients. At September
30, 1997, 1998 and 1999, no one client represented greater than 10% of accounts
receivable or greater than 10% of sales for the periods then ended.
Dependence on Vendors. The Company has relationships with several key
vendors as primary suppliers of computer products to the Company. For the years
ended September 30, 1999, 1998 and 1997, sales derived from products from three,
two and two vendors accounted for 65%, 54%, and 23%, respectively, of the
Company's sales. There can be no assurance that the Company will maintain its
relationship with these vendors, or that it will be able to find alternative
vendors capable of providing product on terms satisfactory to the Company should
its relationship with its current vendors terminate.
2. ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT:
On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO), signed an agreement
to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. The transaction was approved by the outside directors of AmeriQuest and by
the full Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest (see Note 8), in part to release Computer 2000 from its
guarantee of IBMCC, obtained the release of Computer 2000 and its affiliates
from all other guarantees of AmeriQuest obligations, and agreed to pay certain
transaction costs totaling approximately $220,000.
As part of the transaction, completed on July 20, 1998, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends of $2,450,000,
interest of $124,000 and AmeriQuest options and warrants held by Computer 2000.
As a result of the transaction, the number of outstanding shares of
AmeriQuest on a fully diluted basis, was reduced from approximately 118 million
to approximately 67 million. The Board of Directors of the
F-9
<PAGE> 32
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company agreed to reserve 6.7 million shares of common stock for future issuance
to AmeriQuest employees as incentive compensation pursuant to terms to be
approved by outside directors of the board.
3. RESTRUCTURING COSTS AND ASSET IMPAIRMENT:
The components of the restructuring costs and asset impairment for the year
ended September 30, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Provision for losses on inventory and vendors (included in
cost of sales).............................................. $ 4,032
-------
Provision for losses on accounts receivable (included in
SG&A expenses)............................................ 3,945
-------
Intangible write off........................................ 9,036
-------
Restructuring Costs:
Abandonment of leasehold improvements and other
property and equipment........................... 2,448
Lease payments in excess of sublease income....... 1,362
Employee severance costs.......................... 2,680
Other............................................. 2,848
-------
Total classified as restructuring costs...... 9,338
-------
Total costs relating to restructuring and asset
impairment for the years ended September 30,
1997............................................. $26,351
=======
</TABLE>
The components of the remaining restructuring accruals as of September 30,
1997 and the 1998 activity are as follows (in thousands):
<TABLE>
<CAPTION>
RESTRUCTURING RESTRUCTURING
ACCRUALS CHARGED REVERSED INTO ACCRUALS
SEPTEMBER 30, AGAINST INCOME DUE TO SEPTEMBER 30,
1997 ACCRUAL CHANGE IN ESTIMATE 1998
------------- ------- ------------------ -------------
<S> <C> <C> <C> <C>
Lease payments in excess of
sublease income............... $ 618 $ 533 $ 85 $--
Severance costs................. 448 378 70 --
Other........................... 2,672 1,451 1,221 --
------ ------ ------ --
$3,738 $2,362 $1,376 $--
====== ====== ====== ==
</TABLE>
4. ACQUISITIONS AND DISPOSITIONS:
Early in the first quarter of fiscal 1998, AmeriQuest/Kenfil Inc. sold its
wholly owned subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong
corporation and Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation
(collectively, "Kenfil Asia"). Proceeds from the sale of Kenfil Asia were
$450,000, with a gain of $184,000, which was classified as a reduction of
selling, general and administrative expenses in the accompanying Statement of
Operations.
On June 19, 1997, CMS Enhancements Inc., a subsidiary of Ameriquest, sold
substantially all of its assets to CMS Peripherals Inc., a company formed by the
former managing director of CMS Enhancements Inc. CMS Enhancements Inc., as part
of the transaction has changed its name to AAG Inc. AmeriQuest also signed a
non-competition agreement with CMS Peripherals with a term of five years.
The Company had previously pursued a strategy of growth through acquisition
by acquiring regional distributors with the goal of creating a national
distributor of value-added computers, subsystems and peripherals. All of the
Company's acquisitions were accounted for in accordance with the purchase method
of accounting. Intangible assets associated with these acquisitions were
primarily related to acquired distribution
F-10
<PAGE> 33
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
channels, associated vendor relationships and market positions. These
intangibles were being amortized over ten years. Subsequent to these
acquisitions, the Company assessed the recoverability of these intangibles in
accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." As a result of these assessments, the
Company recorded goodwill impairment charges of approximately $9 million and
$23.8 million in fiscal 1997 and fiscal 1995, respectively. Such charges were
required due to the Company's significant operating losses ($165 million
accumulated deficit as of September 30, 1997) and expectation of future
operating performance.
5. INVENTORIES:
Inventories consist of finished goods and are reflected net of reserves for
excess and obsolete inventory. In estimating the inventory reserves, management
relied upon its knowledge of the industry, projected sales volumes, current
inventory levels and aging of product on-hand. Because of the assumptions used,
the amounts the Company will ultimately realize could differ materially in the
near term from the net inventory balances as included in the accompanying
financial statements. Inventories do not contain any labor or overhead. The
Company's contracts with most of its vendors provide price protection and stock
return privileges to reduce to some degree the risk of loss to the Company due
to manufacturer price reductions and slow moving or obsolete inventory.
In fiscal 1999 and 1998, the Company recorded cost of sales benefits of
approximately $400,000 and $1.7 million, respectively, related principally to
the reversal of previously established vendor debit reserves.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Equipment................................................ $ 270 $ 202
Computer Hardware and Software........................... 1,831 1,593
Furniture and fixtures................................... 193 189
Leasehold improvements................................... 332 196
Less accumulated depreciation and amortization........... (1,665) (1,381)
------- -------
$ 961 $ 799
======= =======
</TABLE>
7. ACCRUED EXPENSES AND OTHER:
Accrued expenses and other consist of approximately $377,000 of accrued
payroll and related expenses and approximately $470,000 of deferred income and
other accrued expenses at September 30, 1999. Accrued expenses and other consist
of approximately $819,000 of accrued payroll and related expenses and
approximately $986,00 of other accrued expenses at September 30, 1998. In fiscal
1999 and 1998, the Company recorded operating expense benefits of approximately
$600,000 and $400,000, respectively, related to the reversal of previously
established accruals and reserves.
8. LINES OF CREDIT:
In connection with the purchase, in fiscal 1998, by the Company's
management of the Company's stock held by Computer 2000 (see Note 2), the
Company entered into a three year credit facility with a bank (the "Credit
Facility") to provide additional working capital for the Company. The Company
can borrow on the Credit Facility up to the lesser of $10 million or 80% of
eligible accounts receivable plus the lesser of $3.5 million or 50% of eligible
inventory, as defined. The Credit Facility bears interest at either the banks
F-11
<PAGE> 34
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prime rate plus 150 basis points or libor plus 400 basis points. The Credit
Facility also provides for various covenants including a minimum tangible net
worth and minimum cash flows, as defined.
The Company paid a $100,000 commitment fee during fiscal 1998 and is
obligated to pay fees of 0.5% per annum of unused available borrowings and 2%
per annum on outstanding letters of credit. The Credit Facility can be utilized
for letters of credit in an aggregate amount not to exceed $5 million.
Outstanding letters of credit are a reduction of available borrowing under the
Credit Facility. As of September 30, 1999, the Company has borrowed $2.4 million
on the Credit Facility and has outstanding letters of credit of $300,000.
On December 22, 1999, the Company amended its credit facility. The
amendment waived defaults of the minimum tangible net worth and minimum cash
flow covenants, as defined, as of September 30, 1999 and reset certain financial
covenants effective October 31, 1999.
Prior to July, 1998, the Company had entered into various credit
arrangements with certain domestic and international financial institutions.
During fiscal 1997 and 1998, the Company was in default on these arrangements.
On September 30, 1997, Computer 2000 paid certain bank lines of credit which
totaled $27.7 million and converted the loans to a non-interest bearing demand
loan, agreed to defer payment of this loan through September 1998 and
subordinated any of the remaining loan balance to the remaining financial
institution. The loan balance to the remaining financial institution as of
September 30, 1997 was approximately $3.1 million. On July 20, 1998, Computer
2000 contributed the non-interest bearing demand loan to the capital of the
Company and also contributed $3 million, which was used to repay the then
outstanding loan to this financial institution (see Note 2).
9. INCOME TAXES:
The Company has historically incurred significant operating losses and has
recorded a valuation allowance against its net deferred tax asset, as the
Company believed that it was more likely than not that the net deferred tax
asset would not be realized through operations. The valuation allowance recorded
against the net deferred tax asset is based on management's estimates related to
the Company's ability to realize these benefits. Appropriate adjustments will be
made to the valuation allowance if circumstances warrant in future periods. Such
adjustments may have a significant impact on the Company's financial statements.
The tax effect of significant temporary differences consist of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Inventory reserves............................... $ 68 $ 282 $ 498
Allowance for doubtful accounts.................. 106 209 868
Other, including restructuring charge............ 148 677 8,964
Net operating loss carryforwards................. 5,920 4,556 46,163
Valuation allowance.............................. (6,242) (5,724) (56,493)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
Due to the acquisition by the Company's management of the Company's stock
held by Computer 2000 on July 20, 1998 (see Note 2), there was a change in
ownership as defined by section 382 of the Internal Revenue Code ("Section 382
Limitations"). The Section 382 Limitation limits the Company's ability to
utilize its net operating loss carryforwards created prior to the ownership
change. As of the date of ownership change (July 20, 1998), the Company had net
operating loss carryforwards available to offset future taxable income of up to
approximately $11.9 million. Such carryforwards may be subject to further
limitation. Subsequent to July 20, 1998, the Company has generated additional
net operating loss carryforwards of
F-12
<PAGE> 35
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $1.5 million and $4.0 million in fiscal 1998 and 1999,
respectively. The Company has not benefited from these net operating
carryforwards as of September 30, 1999.
The principal elements accounting for the difference between income taxes
computed at the statutory rate and the effective rate are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 1998 1997
----- ---- --------
<S> <C> <C> <C>
Tax expense (benefit) computed at statutory rate......... (764) 300 $(15,492)
Intangible write-offs, amortization and other
nondeductible amounts.................................... 6 46 7,992
Net operating losses not benefited....................... 758 -- 7,500
Benefit of net operating losses previously reserved...... -- (346) --
----- ---- --------
$ -- $ -- $ --
===== ==== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its corporate office, warehouse space and certain
equipment under operating leases. Future minimum rental commitments (net of
contractual sub-rental income for fiscal 2000 of $192,326) for all
non-cancelable operating leases at September 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- ------------------------
<S> <C>
2000........................................................ 483,366
2001........................................................ 239,938
2002........................................................ 233,670
2003........................................................ 200,050
2004........................................................ --
----------
$1,157,024
==========
</TABLE>
Total rental expense net of sub-rental income under non-cancelable
agreements for the years ending September 30, 1999, September 30, 1998, and
September 30, 1997 was approximately $355,000, $589,000, and $4,298,000,
respectively.
In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI
Insurance Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts
due for the settlements were $920,000. At September 30, 1997, the Company had
reserves in excess of the settlement amounts of approximately $1.3 million,
which were taken into income during fiscal 1998 as an offset to selling, general
and administrative expense in the accompanying consolidated statement of
operations.
The Company is a party to various legal matters arising in the ordinary
course of business. Management believes that the ultimate outcome of these
matters will not have a material adverse effect on the Company's future
financial position or its results of operations.
11. STOCK OPTION PLANS:
The Company has instituted various stock option plans, which authorize the
granting of options to key employees, directors, officers, vendors and clients
to purchase shares of the Company's common stock. All grants of options during
the years presented have been to employees or directors and were granted at the
then
F-13
<PAGE> 36
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
quoted market price. A summary of shares available for grant and the options
outstanding under the plans is as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING RANGE
---------- ----------- ------------
<S> <C> <C> <C>
Balances at September 30, 1995................ 154,020 2,422,574 $0.05 - 4.50
Options exchanged in an acquisition........... (301,978) 301,978 0.45 - 2.00
Options exercised............................. -- (82,500) 0.05
Options cancelled............................. 447,561 (447,561) 0.45 - 4.50
---------- ---------- ------------
Balances at September 30, 1996................ 299,603 2,194,491 $0.05 - 4.50
Options cancelled............................. 1,628,987 (1,628,987) 0.05 - 3.50
---------- ---------- ------------
Balances at September 30, 1997................ 1,928,590 565,504 $0.45 - 4.50
Options no longer available for grant......... (365,953) -- --
Options cancelled............................. 437,363 (437,363) 0.45 - 4.50
Options granted............................... (1,910,000) 1,910,000 0.08
---------- ---------- ------------
Balances at September 30, 1998................ 90,000 2,038,141 $0.08 - 0.45
Increase in shares available for grant........ 4,700,000 -- --
Options no longer available for grant......... (128,141) -- --
Options cancelled............................. 318,141 (318,141) 0.08 - 0.45
Options granted............................... (150,000) 150,000 0.06 - 0.11
---------- ---------- ------------
Balances at September 30, 1999................ 4,830,000 1,870,000 $0.06 - 0.11
========== ========== ============
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
OUTSTANDING AS OF WEIGHTED
RANGE OF SEPTEMBER 30, REMAINING AVERAGE OPTIONS
EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE
-------------- ----------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
$ 0.08 1,720,000 107 months $0.08 688,000
0.06 50,000 113 months 0.06 10,000
0.11 100,000 119 months 0.11 --
------------ --------- ----- -------
$0.06 - 0.11 1,870,000 $0.08 698,000
============ ========= ===== =======
</TABLE>
The Company accounts for its option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company follows the disclosure
requirements of Financial Accounting Standards Board No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value based
method of accounting for stock-based compensation plans. SFAS 123 requires that
an employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
the plan. Had the Company recognized compensation cost for its stock option
F-14
<PAGE> 37
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plans consistent with the provisions of SFAS 123, the following pro forma net
loss to common stockholders for each of the three years in the period ended
September 30, 1999 would have resulted:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1999 1998
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net loss to common stockholders:
As reported............................................... $1,909 $ 828
====== ======
As calculated in accordance with SFAS 123................. $1,923 $ 829
====== ======
Net income/(loss) per Common Share:
As reported............................................... $(0.03) $(0.01)
====== ======
As calculated............................................. $(0.03) $(0.01)
====== ======
Shares used in calculating net income per diluted common
share..................................................... 67,329 66,882
====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with risk-free interest rates of 4.96%
to 5.99%, no expected dividend yield, an expected life of five years and a
volatility factor of 50%. As of September 30, 1999, the weighted average fair
value of the options outstanding is $0.04 per option. No options were granted in
fiscal year 1997. Accordingly, no compensation cost had been recorded or
proforma disclosures are required under the provisions of SFAS 123.
12. FOREIGN SALES INFORMATION:
A summary of the Company's operations by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
U.S. FAR EAST ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1999
Sales to unaffiliated clients......... $ 56,865 -- $ 56,865
Loss (income) from operations......... (1,909) -- -- (1,909)
Identifiable assets................... 14,168 -- -- 14,168
Year Ended September 30, 1998
Sales to unaffiliated clients......... $ 60,466 -- -- $ 60,466
Loss (income) from operations......... (747) -- -- (747)
Identifiable assets................... 12,955 -- -- 12,955
Year Ended September 30, 1997
Sales to unaffiliated clients......... $194,342 $24,535 -- $218,877
Loss (income) from operations......... 37,887 (31) -- 37,856
Identifiable assets................... 19,799 6,280 -- 26,079
</TABLE>
United States sales include export sales of $5.3 million, made principally
to Europe, Latin America, the Far East and Canada during the fiscal year ended
September 30, 1997. See Footnote 4 for disposition of the Far East operations.
F-15
<PAGE> 38
SCHEDULE II
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND ACCOUNTS AT END
OF PERIOD EXPENSE WRITTEN-OFF OTHER OF PERIOD
---------- ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Description
Allowance for Doubtful Accounts:
October 1, 1996 to September 30,
1997................................ 5,811 4,970 8,625 -- 2,156
October 1, 1997 to September 30,
1998................................ 2,156 -- 1,547 -- 609
October 1, 1998 to September 30,
1999................................ 609 -- 137 208(2)-- 264
Restructuring Accounts
October 1, 1996 to September 30,
1997................................ -- 9,338 5,600 -- 3,738
October 1, 1997 to September 30,
1998................................ 3,738 -- 2,362 1,376(1) --
</TABLE>
- ---------------
(1) Reversed into income due to change in estimate. See Note 3 to Notes to
Consolidated Financial Statements.
(2) Reversed into income due to change in estimate. See Note 7 to Notes to
Consolidated Financial Statements.
F-16
<PAGE> 1
EXHIBIT 10.05 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of February 1,
1999 (the "Effective Date") between AmeriQuest Technologies, Inc., a Delaware
corporation with its principal offices located at 2465 Maryland Road, Willow
Grove, PA 19090 ("Company"), and Michael D. McCarthy, a resident of Georgia
("Employee").
In consideration of the promises and the terms and conditions set forth in this
Agreement, the parties agree as follows:
1. POSITION. During the term of this Agreement, Company will employ
Employee, and Employee will serve Company as the Company's Vice
President, Sales and Marketing and as an Officer of the Company.
Employee will report directly to the Chief Executive Officer.
2. DUTIES. Employee will serve Company in such capacities and with such
duties and responsibilities as the Chief Executive Officer of Company
may from time to time determine. Employee will be bound by Company'
operating policies, procedures, and practices from time to time in
effect during Employee's employment. Employee will perform his duties
under this Agreement at the offices of Company, provided, that Employee
may be required to do extensive traveling in connection with the
performance of his duties hereunder. Employee hereby represents and
warrants that he is free to enter into and fully perform this Agreement
and the agreements referred to herein without breach of any agreement
or contract to which he is a party or by which he is bound.
3. EXCLUSIVE SERVICE. During his employment with Company, Employee will
devote his full time and efforts exclusively to this employment and all
his skill and experience to the performance of his duties and advancing
of the Company's interests in accordance with Employee's experience and
skills. In addition, during his employment with Company, Employee will
not engage in any consulting activity except with the prior written
approval of the Company or at the direction of Company, and Employee
will otherwise do nothing inconsistent with the performance of his
duties hereunder.
4. OBLIGATION NOT TO COMPETE. Employee hereby agrees that while he is
employed by Company (the "Restricted Period"), Employee shall within
the territory of the United States not engage in or provide services to
any business that is competitive with or detrimental to any present or
contemplated business of Company known to Employee. Employee also
agrees that, during the Restricted Period, he shall not in any manner
attempt to induce or assist others to attempt to induce any customer or
client of Company to terminate his association with Company, nor do
anything directly or indirectly to interfere with the relationship
between Company and any such persons or concerns in the territory of
the United States. Each of the following activities shall, without
limitation, be
<PAGE> 2
Page 2
Employment Agreement Michael D. McCarthy
deemed to constitute engaging in business within the meaning of Section
3 and 4: to engage in, work with, have an interest or concern in,
advise, lend money to, guarantee the debts or obligations of, or permit
one's name or any party thereof to be used in connection with, an
enterprise of endeavor, either individually, in partnership or in
conjunction with any person or persons, firms, associations, companies
or corporations, whether as a principal, agent, shareholder, employee,
officer, director, partner, consultant or in any other manner
whatsoever; provided, however, that Employee shall retain the right to
invest in or have an interest in entities traded on any public market
or offered by any national brokerage house, provided that said interest
does not exceed ten percent (10%) of the voting control of said entity.
In addition, Employee may make passive investments in privately held
entities that are determined by the Board of Directors of Company not
to be competitors of Company. Company may elect to extend the term of
this non-competition clause for a maximum period of six months
following the termination according to Section 8.1. (b) and 8.1. (c)
provided that a monthly fee in the amount of the last applicable
monthly base salary is paid to Employee.
5. TERM OF AGREEMENT. This Agreement will commence on the Effective Date,
and will continue for a period of twelve (12) months and thereafter
unless terminated pursuant to Section 8 thereof.
6. COMPENSATION AND BENEFITS.
6.1. BASE SALARY. Company agrees to pay Employee a base salary of
$5,769 bi-weekly (or $150,000 annualized). Employee's salary
will be payable as earned in accordance with Company'
customary payroll practice.
6.2. PERFORMANCE BONUS. - Employee will be eligible to earn a bonus
of up to $150,000 (the "Performance Bonus") annually during
his employment with Company. The performance criteria and
terms and conditions relative to the Performance Bonus shall
be in accordance with the attached "Incentive Plan"
(Attachment 1).
6.3. ADDITIONAL BENEFITS. Employee will be eligible to participate
in Company's employee benefit plans of general application,
including without limitation those plans covering profit
sharing, executive bonuses, stock options, and those plans
covering life, health, an dental insurance in accordance with
the rules established for individual participation in any such
plan and applicable law. Employee shall receive such other
benefits, including vacation, holidays, and sick leave, as
Company generally provides to its employee holding similar
positions as that of Employee.
6.4. VACATION. Four (4) weeks.
6.5. EXPENSES. Company will reimburse Employee for all reasonable
and necessary expenses incurred by Employee in connection with
Company's business, provided that such expenses are deductible
to Company, are in
<PAGE> 3
Page 3
Employment Agreement Michael D. McCarthy
accordance with Company's applicable policy and are properly
documented and accounted for in accordance with the
requirements of the Internal Revenue Service.
7. PROPRIETARY RIGHTS. Employee hereby agrees to execute an Employee
Confidentiality Agreement with Company in substantially the form
attached hereto as Attachment 2.
8. TERMINATION.
8.1 EVENTS OF TERMINATION. Employee's employment with the Company
shall terminate upon any one of the following:
a) the Company's determination made in good faith that
it is terminating Employee for "cause" as defined
under Section 8.2 below ("Termination for Cause");
b) six months after the effective date of a written
notice sent to Employee stating that Company is
terminating his employment, without cause, which
notice can be given by Company at any time after the
Effective Date at Company's sole discretion, for any
reason or for no reason; or
c) six months after the effective date of a written
notice sent to Company from Employee stating that
Employee is electing to terminate his employment with
Company.
d) If a change of control occurs and the employee's
responsibilities are reduced within the following
twelve (12) months thereafter. This termination on
the part of the employee must be effected within six
(6) months of the significant reduction in
responsibilities. A "change in control" is deemed to
have taken place when any of the following events
occurs: (1) shareholder approval of a merger or
consolidation of the Company with any other
corporation resulting in a change in fifty percent
(50%) or more of the total voting power of the
Company; (2) shareholder approval of a plan of
complete liquidation of the Company or an agreement
for the sale or disposition of all or substantially
all of the Company assets; or (3) any person becomes
the beneficial owner of more than fifty percent (50%)
of the Company's total outstanding securities); and
such reduction in responsibilities is not for cause.
Any resignation of employment by Michael D. McCarthy
as a consequence of such reduction in
responsibilities will be treated as a termination of
employment without cause.
8.2 "CAUSE" DEFINED. For purposes of this Agreement, "cause" for
Employee's termination will exist any time after the happening
of one or more of the following events;
<PAGE> 4
Page 4
Employment Agreement Michael D. McCarthy
a) a failure or refusal to comply in any material
respect with the reasonable policies, standards or
regulations of the Company;
b) a failure or a refusal in any material respect,
faithfully or diligently, to perform his duties
determined by the Company in accordance with this
Agreement or the customary duties of Employee's
employment;
c) unprofessional, unethical or fraudulent conduct or
conduct that materially discredits the Company or is
materially detrimental to the reputation, character
or standing of the Company;
d) dishonest conduct or a deliberate attempt to do an
injury to the Company;
e) Employee's material breach of a term of this
Agreement;
f) an unlawful or criminal act which would reflect badly
on the Company in the Company's reasonable judgment;
or
g) employee's death.
9. EFFECT OF TERMINATION.
9.1 TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION. In the event
of any termination of this Agreement pursuant to Sections
8.1(a) or 8.1( c), the Company shall pay Employee the
compensation and benefits otherwise payable to Employee under
Section 6 through the effective date of termination.
Employee's rights under the Company's benefit plans of general
application shall be determined under the provisions of those
plans.
9.2 TERMINATION WITHOUT CAUSE. In the event of any termination of
this Agreement pursuant to Section 8.1(b), the Company shall
pay Employee the compensation and benefits according to
Section 6 through the last day of the six (6) months period
following the effective date that the notice referred to in
Section 8.1(b) is given.
9.3 TERMINATION WITHOUT CAUSE DUE TO CHANGE IN CONTROL. In the
event of any termination of this Agreement pursuant to Section
8.1(d), the Company shall pay Employee the compensation and
benefits according to Section 6 through the last day of the
twelve (12) months period following the date that the notice
referred to in Section 8.1(d) is given.
10. MISCELLANEOUS.
10.1 ARBITRATION. Employee and Company shall submit to mandatory
binding arbitration in any controversy or claim arising out
of, or relating to, this Agreement or any breach hereof,
provided, however, that Company retains its right to, and
shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a
court having jurisdiction over the parties. Such arbitration
shall be conducted in accordance with the commercial
arbitration rules of the American Arbitration Association in
effect at that time, and judgment upon the determination or
award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
<PAGE> 5
Page 5
Employment Agreement Michael D. McCarthy
10.2 SEVERABILITY. If any provision of this Agreement shall be
found by any arbitrator or court of competent jurisdiction to
be invalid or unenforceable, then the parties hereby waive
such provision to the extent that it is found to be invalid or
unenforceable and to the extent that do so would not deprive
one of the parties of the substantial benefit of its bargain.
Such provision shall, to the extent allowable by the law and
the preceding sentence be modified by such arbitrator or court
so that it becomes enforceable and, as modified, shall be
enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
10.3. REMEDIES. Company and Employee acknowledge that the service to
be provided by Employee is of a special, unique, unusual,
extraordinary, and intellectual character, which give it
peculiar value the loss of which cannot be reasonably or
adequately compensated in damages in an action at law.
Accordingly, Employee hereby consents and agrees that for any
breach or violation by Employee of any of the provisions of
this Agreement including, without limitation, Section3, a
restraining order and/or injunction may be issued against
Employee, in addition to any other rights and remedies Company
may have, at law equity, including without limitation the
recovery of money damages.
10.4. NO WAIVER. The failure by either party at any time to require
performance or compliance by the other of any of its
obligations or agreements shall in no way affect the right to
require such performance or compliance at any time thereafter.
The waiver by either party of a breach of such provision
hereof shall not be taken or held to be a waiver or any
preceding or succeeding breach of such provision or as a
waiver of the provision itself. No waiver of any kind shall be
effective or binding, unless it is in writing and is signed by
the party against whom such waiver is sought to be enforced.
10.5. ASSIGNMENT. This Agreement and all rights hereunder are
personal to Employee and may not be transferred or assigned by
Employee at any time. Company may assign its rights, together
with its obligations thereunder, to any parent, subsidiary
affiliate or successor or in connection with any sale,
transfer or other disposition of all or substantially all of
its business and assets, provided, however, that any such
assignee assumes Company's obligations hereunder.
10.6 WITHHOLDING. All sums payable to Employee thereunder shall be
reduced by all federal, state, local, and other withholding
and similar taxes and payments required by applicable law.
10.7 ENTIRE AGREEMENT. This Agreement and the Employee
Confidentiality Agreement constitute the entire and only
agreements between the parties relating to employment of
Employee with Company, and this Agreement
<PAGE> 6
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Employment Agreement Michael D. McCarthy
supersedes and cancels any and all previous contracts,
arrangements or understandings with respect thereto.
10.8 AMENDMENT. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended only by an
agreement in writing executed by both parties hereto.
10.9 NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing and
hand-delivered, sent by Fax, sent by certified first-class
mail, postage pre-paid, or sent by nationally recognized
express courier service. Such notices and other communications
shall be effective upon receipt if hand-delivered or sent by
Fax, five (5) days after mailing if sent by mail, and one (1)
day after dispatch if sent by express courier, to the
following address, or such other addresses as any party shall
notify the other parties:
If to the Company: AmeriQuest Technologies, Inc.
2465 Maryland Road
Willow Grove, PA 19090
Fax Number: (215) 658-8968
Attention: Mr. Jon D. Jensen
Corporate Secretary
If to the Employee: Michael D. McCarthy
1084 Tennyson Place
Atlanta, GA 30319
Fax Number: (404) 250-9905
10.10 BINDING NATURE. This Agreement shall be binding upon, and
inure to the benefit of the successors and personal
representatives of the respective parties hereto.
10.11 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the
singular includes the plural, the plural includes the
singular, the masculine gender includes both male and female
referents, and the word "or" is used in the inclusive sense.
10.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original
but all of which, taken together, constitute one and the same
agreement.
<PAGE> 7
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Employment Agreement Michael D. McCarthy
10.13 GOVERNING LAW. This Agreement and rights and obligations of
the parties hereto shall be construed in accordance with the
laws of the State of Pennsylvania, without giving effect to
the principles of conflict of laws.
IN WITNESS WHEREOF, Company and Employee have executed this Agreement as of the
date first above written.
"COMPANY" "EMPLOYEE"
AMERIQUEST TECHNOLOGIES, INC.
Signature: Signature
----------------------------- --------------------------
Name: Jon D. Jensen Name: Michael D. McCarthy
Title: COO, CFO and Secretary Title: V. P., Sales and Marketing
Signature:
-----------------------------
Name: Alexander C. Kramer
Title: President and CEO
<PAGE> 8
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Employment Agreement Michael D. McCarthy
"INCENTIVE PLAN"
(ATTACHMENT 1)
1) The Employee shall be entitled to a payment under the Incentive Plan for
the financial year commencing 1st October, 1998 ("the incentive scheme")
calculated in accordance with and subject to the conditions set out below
("the incentive payments"). The incentive payments shall comprise the
variable compensation parts determined in accordance with paragraph 4.
Subject to paragraph 3 below, the achievements shall form the basis of the
calculation of the variable compensation parts. All references in this
incentive scheme are to gross figures. The Compensation Committee of the
Board of Directors of AmeriQuest Technologies ("the Committee") reserves
the right in its absolute discretion to change the base salary and variable
compensation parts for future years and/or to terminate the incentive
scheme at the end of the fiscal year commencing October 1, 1998.
2) The following incentive scheme applies for the fiscal year ended September
30, 1999:
a) The TARGET COMPENSATION (100% compensation) amounts to
US$300,000.
b) 50% of the target compensation (US$150,000) is fixed as the
BASE SALARY which is payable bi-weekly.
c) The MAXIMUM COMPENSATION amounts to 100% of the target
compensation.
d) The variable compensation parts are:
i) Target Incentive: up to 50% of the target
compensation, depending on the achievement of the
targets in paragraph 3b.
3) Basis for calculation: The targets for the 1999 fiscal year and the weights
of the individual targets are quantified below. The target achievement will
be calculated for each individual target. The total target achievement will
be calculated, depending on the given weights.
a) The TARGETS for the 1999 fiscal year are:
i) REVENUE target for the year ended September 30, 1999
= US$80,000,000.
(1) SIX MONTH CUMULATIVE target for the quarter
ended March 31=$37,600,000.
(2) NINE MONTH CUMULATIVE target for the quarter
ended June 30 = $58,200,000.
ii) GROSS PROFIT target for the year ended September 30,
1999 = US$7,200,000.
(1) SIX MONTH CUMULATIVE target for the quarter
ended March 31=$3,300,000.
(2) NINE MONTH CUMULATIVE target for the quarter
ended June 30 = $5,100,000.
b) The WEIGHTING of each target in 3a above is 50% equally.
<PAGE> 9
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Employment Agreement Michael D. McCarthy
c) The audited financial statements of the Company will form the
basis of the actual target achievement ("the calculation").
The Committee may, in its absolute discretion, exclude
extraordinary events from the calculation.
4) The variable compensation parts will be determined by comparing the actual
cumulative quarterly target achievement referred to at paragraph 3d above
with the cumulative quarterly targets shown in paragraph 3a. Any incentive
payments for the fiscal year 1999 shall comprise the following parts and
each shall be determined as follows:
a) If the total target achievement is less than 65%, no incentive
payment will be made, except that, a minimum payment of
$25,000 is guaranteed and payable for the quarter ended March
31, 1999 in accordance with paragraph 6.
b) If the total target achievement is more than 65% but less than
90%, the incentive payment will be US$5,000 for each
percentage point above 65%, but not less than the minimum
guaranteed payment of $25,000 in 4a above (equal to 70%
achievement).
c) If the total target achievement is between 90% and 100%, the
incentive payment will be $125,00 plus US$2,500 for each
percentage point above 90%.
5) In the event that the Employee shall be employed by the Company for only
part of the remainder of the fiscal year, the Employee shall be entitled to
have the incentive payments referred to at paragraph 4 above calculated on
a pro rata basis by reference to that part of the fiscal year during which
he/she was employed by the Company.
6) The variable compensation part will be calculated quarterly by the Chief
Financial Officer and approved by the Committee.
a) For 1999 only, one third of the above paragraph 4 determined
incentive payment or $25,000, whichever is greater, will be
made for the quarter ended March 31. Two thirds of the above
paragraph 4 determined incentive payment less the previous
quarterly payment, will be made for the quarter ended June 30.
All of the above paragraph 4 determined incentive less the
previous quarterly payments, will be made for the year ended
September 30.
b) In future fiscal years, 25%, 50%, 75% and 100% of the above
paragraph 4 determined incentive less the previous quarterly
payments, will be made for the respective quarters.
c) They becomes payable to the Employee on the first bi-weekly
pay period following approval by the Committee.
7) In the event there is disagreement as to the calculation of the variable
compensation parts, the parties will try to come to an amicable solution.
Should such an amicable solution not be possible, the decision of the
outside auditor of the Company will be final and binding.
<PAGE> 1
EXHIBIT 10.09 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999
AMERIQUEST TECHNOLOGIES, INC.
1998 EQUITY COMPENSATION PLAN
The purpose of the AmeriQuest Technologies, Inc. 1998 Equity
Compensation Plan (the "Plan") is to provide (i) designated employees of
AmeriQuest Technologies, Inc. (the "Company") and its subsidiaries, (ii) certain
consultants and advisors who perform services for the Company or its
subsidiaries and (iii) non-employee members of the Board of Directors of the
Company (the "Board") with the opportunity to receive grants of incentive stock
options, nonqualified stock options and stock of the Company. The Company
believes that the Plan will encourage the participants to contribute materially
to the growth of the Company, thereby benefitting the Company's shareholders,
and will align the economic interests of the participants with those of the
shareholders.
1. Administration
(a) Committee. The Plan shall be administered and interpreted
by a committee appointed by the Board (the "Committee"), which may consist of
"outside directors" as defined under section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), and related Treasury regulations and
"non-employee directors" as defined under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(b) Committee Authority. The Committee shall have the sole
authority to (i) determine the individuals to whom grants shall be made under
the Plan, (ii) determine the type, size and terms of the grants to be made to
each such individual, (iii) determine the time when the grants will be made and
the duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability and (iv) deal
with any other matters arising under the Plan.
(c) Committee Determinations. The Committee shall have full
power and authority to administer and interpret the Plan, to make factual
determinations and to adopt or amend such rules, regulations, agreements and
instruments for implementing the Plan and for the conduct of its business as it
deems necessary or advisable, in its sole discretion. The Committee's
interpretations of the Plan and all determinations made by the Committee
pursuant to the powers vested in it hereunder shall be conclusive and binding on
all persons having any interest in the Plan or in any awards granted hereunder.
All powers of the Committee shall be executed in its sole discretion, in the
best interest of the Company, not as a fiduciary, and in keeping with the
objectives of the Plan and need not be uniform as to similarly situated
individuals.
2. Grants
Awards under the Plan may consist of grants of incentive stock
options ("Incentive Stock Options") and nonqualified stock options
("Nonqualified Stock Options") as described in Section 5 (Incentive Stock
Options and Nonqualified Stock Options are collectively referred to as
"Options") and stock grants as described in Section 6 ("Stock Grants") (Options
and Stock Grants are hereinafter collectively referred to as "Grants"). All
Grants shall be subject to the terms and conditions set forth herein and to such
other terms and conditions consistent with this Plan as the Committee deems
appropriate and as are specified in writing by the Committee to the individual
in a grant instrument or an amendment to the grant instrument (the "Grant
Instrument"). The Committee shall approve the form and provisions of each Grant
Instrument. Grants under a particular Section of the Plan need not be uniform as
among the grantees.
3. Shares Subject to the Plan
(a) Shares Authorized. Subject to adjustment as described
below, the aggregate number of shares of common stock of the Company ("Company
Stock") that may be issued or transferred under the Plan is 4,700,000 shares.
After a Public Offering, the maximum aggregate number of shares of Company Stock
that shall be subject to Grants made under the Plan to any individual during any
calendar year shall be 800,000 shares, subject
<PAGE> 2
to adjustment as described below. The shares may be authorized but unissued
shares of Company Stock or reacquired shares of Company Stock, including shares
purchased by the Company on the open market for purposes of the Plan. If and to
the extent Options granted under the Plan terminate, expire, or are canceled,
forfeited, exchanged or surrendered without having been exercised or if any
shares subject to a Stock Grant are forfeited, the shares subject to such Grants
shall again be available for purposes of the Plan.
(b) Adjustments. If there is any change in the number or kind
of shares of Company Stock outstanding (i) by reason of a stock dividend,
spinoff, recapitalization, stock split, or combination or exchange of shares,
(ii) by reason of a merger, reorganization or consolidation in which the Company
is the surviving corporation, (iii) by reason of a reclassification or change in
par value, or (iv) by reason of any other extraordinary or unusual event
affecting the outstanding Company Stock as a class without the Company's receipt
of consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in any year, the number
of shares covered by outstanding Grants, the kind of shares issued under the
Plan, and the price per share of such Grants may be appropriately adjusted by
the Committee to reflect any increase or decrease in the number of, or change in
the kind or value of, issued shares of Company Stock to preclude, to the extent
practicable, the enlargement or dilution of rights and benefits under such
Grants; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated. Any adjustments determined by the Committee
shall be final, binding and conclusive.
4. Eligibility for Participation
(a) Eligible Persons. All employees of the Company and its
subsidiaries ("Employees"), including Employees who are officers or members of
the Board, and members of the Board who are not Employees ("Non-Employee
Directors") shall be eligible to participate in the Plan. Consultants and
advisors who perform services for the Company or any of its subsidiaries ("Key
Advisors") shall be eligible to participate in the Plan if the Key Advisors
render bona fide services and such services are not in connection with the offer
or sale of securities in a capital-raising transaction.
(b) Selection of Grantees. The Committee shall select the
Employees, Non-Employee Directors and Key Advisors to receive Grants and shall
determine the number of shares of Company Stock subject to a particular Grant in
such manner as the Committee determines. Employees, Key Advisors and
Non-Employee Directors who receive Grants under this Plan shall hereinafter be
referred to as "Grantees".
5. Granting of Options
(a) Number of Shares. The Committee shall determine the number
of shares of Company Stock that will be subject to each Grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) Type of Option and Price.
(i) The Committee may grant Incentive Stock Options
that are intended to qualify as "incentive stock options" within the meaning of
section 422 of the Code or Nonqualified Stock Options that are not intended so
to qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options, all in accordance with the terms and conditions set forth herein.
Incentive Stock Options may be granted only to Employees. Nonqualified Stock
Options may be granted to Employees, Non-Employee Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of
Company Stock subject to an Option shall be determined by the Committee and may
be equal to, greater than, or less than the Fair Market Value (as defined below)
of a share of Company Stock on the date the Option is granted; provided,
however, that (x) the Exercise Price of an Incentive Stock Option shall be equal
to, or greater than, the Fair Market Value of a share of Company Stock on the
date the Incentive Stock Option is granted and (y) an Incentive Stock Option may
not be granted to an Employee who, at the time of grant, owns stock possessing
more than 10% of the total combined
<PAGE> 3
voting power of all classes of stock of the Company or any parent or subsidiary
of the Company, unless the Exercise Price per share is not less than 110% of the
Fair Market Value of Company Stock on the date of grant.
(iii) If the Company Stock is publicly traded, then
the Fair Market Value per share shall be determined as follows: (x) if the
principal trading market for the Company Stock is a national securities exchange
or the Nasdaq National Market, the last reported sale price thereof on the
relevant date or (if there were no trades on that date) the latest preceding
date upon which a sale was reported, or (y) if the Company Stock is not
principally traded on such exchange or market, the mean between the last
reported "bid" and "asked" prices of Company Stock on the relevant date, as
reported on Nasdaq or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Company Stock is
not publicly traded or, if publicly traded, is not subject to reported
transactions or "bid" or "asked" quotations as set forth above, the Fair Market
Value per share shall be as determined by the Committee.
(c) Option Term. The Committee shall determine the term of
each Option. The term of any Option shall not exceed ten years from the date of
grant. However, an Incentive Stock Option that is granted to an Employee who, at
the time of grant, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, or any parent or subsidiary
of the Company, may not have a term that exceeds five years from the date of
grant.
(d) Exercisability of Options. Options shall become
exercisable in accordance with such terms and conditions, consistent with the
Plan, as may be determined by the Committee and specified in the Grant
Instrument. The Committee may accelerate the exercisability of any or all
outstanding Options at any time for any reason.
(e) Termination of Employment, Disability or Death.
(i) Except as provided below, an Option may only be
exercised while the Grantee is employed by, or providing service to, the Company
as an Employee, Key Advisor or member of the Board. In the event that a Grantee
ceases to be employed by, or provide service to, the Company for any reason
other than a "disability", death, or termination for "cause", any Option which
is otherwise exercisable by the Grantee shall terminate unless exercised within
90 days after the date on which the Grantee ceases to be employed by, or provide
service to, the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration of the
Option term. Except as otherwise provided by the Committee, any of the Grantee's
Options that are not otherwise exercisable as of the date on which the Grantee
ceases to be employed by, or provide service to, the Company shall terminate as
of such date.
(ii) In the event the Grantee ceases to be employed
by, or provide service to, the Company on account of a termination for "cause"
by the Company, any Option held by the Grantee shall terminate as of the date
the Grantee ceases to be employed by, or provide service to, the Company. In
addition, notwithstanding any other provisions of this Section 5, if the
Committee determines that the Grantee has engaged in conduct that constitutes
"cause" at any time while the Grantee is employed by, or providing service to,
the Company or after the Grantee's termination of employment or service, any
Option held by the Grantee shall immediately terminate, and the Grantee shall
automatically forfeit all shares underlying any exercised portion of an Option
for which the Company has not yet delivered the share certificates, upon refund
by the Company of the Exercise Price paid by the Grantee for such shares.
(iii) In the event the Grantee ceases to be employed
by, or provide service to, the Company because the Grantee is "disabled", any
Option which is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by, or provide service to, the Company (or within such other period of
time as may be specified by the Committee), but in any event no later than the
date of expiration of the Option term. Except as otherwise provided by the
Committee, any of the Grantee's Options which are not otherwise exercisable as
of the date on which the Grantee ceases to be employed by, or provide service
to, the Company shall terminate as of such date.
<PAGE> 4
(iv) If the Grantee dies while employed by, or
providing service to, the Company or within 90 days after the date on which the
Grantee ceases to be employed or provide service on account of a termination
specified in Section 5(e)(i) above (or within such other period of time as may
be specified by the Committee), any Option that is otherwise exercisable by the
Grantee shall terminate unless exercised within one year after the date on which
the Grantee ceases to be employed by, or provide service to, the Company (or
within such other period of time as may be specified by the Committee), but in
any event no later than the date of expiration of the Option term. Except as
otherwise provided by the Committee, any of the Grantee's Options that are not
otherwise exercisable as of the date on which the Grantee ceases to be employed
by, or provide service to, the Company shall terminate as of such date.
(v) For purposes of this Section 5(e) and Section 6:
(A) The term "Company" shall mean the Company and its
parent and subsidiary corporations.
(B) "Employed by, or provide service to, the Company"
shall mean employment or service as an Employee, Key Advisor
or member of the Board (so that, for purposes of exercising
Options and satisfying conditions with respect to Stock
Grants, a Grantee shall not be considered to have terminated
employment or service until the Grantee ceases to be an
Employee, Key Advisor and member of the Board), unless the
Committee determines otherwise.
(C) "Disability" shall mean a Grantee's becoming
disabled within the meaning of section 22(e)(3) of the Code.
(D) "Cause" shall mean, except to the extent
specified otherwise by the Committee, a finding by the
Committee that the Grantee (i) has breached his or her
employment or service contract with the Company, (ii) has been
engaged in disloyalty to the Company, including, without
limitation, fraud, embezzlement, theft, commission of a felony
or proven dishonesty in the course of his or her employment or
service, (iii) has disclosed trade secrets or confidential
information of the Company to persons not entitled to receive
such information, or (iv) has engaged in such other conduct
detrimental to the interests of the Company as the Committee
considers to be "cause."
(f) Exercise of Options. A Grantee may exercise an Option that
has become exercisable, in whole or in part, by delivering a notice of exercise
to the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y) with
the approval of the Committee, by delivering shares of Company Stock owned by
the Grantee (including Company Stock acquired in connection with the exercise of
an Option, subject to such restrictions as the Committee deems appropriate) and
having a Fair Market Value on the date of exercise equal to the Exercise Price
or (z) by such other method as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Shares of Company Stock used to exercise an Option shall
have been held by the Grantee for the requisite period of time to avoid adverse
accounting consequences to the Company with respect to the Option. The Grantee
shall pay the Exercise Price and the amount of any withholding tax due (pursuant
to Section 7) at the time of exercise.
(g) Limits on Incentive Stock Options. Each Incentive Stock
Option shall provide that, if the aggregate Fair Market Value of the stock on
the date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year, under the
Plan or any other stock option plan of the Company or a parent or subsidiary,
exceeds $100,000, then the Option, as to the excess, shall be treated as a
Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any
person who is not an Employee of the Company or a parent or subsidiary (within
the meaning of section 424(f) of the Code).
6. Stock Grants
The Committee may issue or transfer shares of Company Stock to
an Employee, Non-Employee Director or Key Advisor under a Stock Grant of
restricted or unrestricted stock, upon such terms as the Committee deems
appropriate. The following provisions are applicable to Stock Grants:
<PAGE> 5
(a) General Requirements. Shares of Company Stock issued or
transferred pursuant to Stock Grants may be issued or transferred for
consideration or for no consideration, such as pursuant to a bonus program, as
determined by the Committee. The Committee may establish conditions under which
restrictions on shares of Company Stock shall lapse over a period of time or
according to such performance or other criteria as the Committee deems
appropriate. The period of time during which the Company Stock will remain
subject to restrictions will be designated in the Grant Instrument as the
"Restriction Period."
(b) Number of Shares. The Committee shall determine the number
of shares of Company Stock to be issued or transferred pursuant to a Stock Grant
and any restrictions applicable to such shares.
(c) Requirement of Employment or Service. If the Grantee
ceases to be employed by, or provide service to, the Company (as defined in
Section 5(e)) during a period designated in the Grant Instrument as the
Restriction Period, or if other specified conditions are not met, the Stock
Grant shall terminate as to all shares covered by the Grant as to which the
restrictions have not lapsed, and those shares of Company Stock must be
immediately returned to the Company. The Committee may, however, provide for
complete or partial exceptions to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate.
During the Restriction Period, a Grantee may not sell, assign, transfer, pledge
or otherwise dispose of the shares of restricted stock covered by the Stock
Grant except to a Successor Grantee under Section 8(a). Each certificate for a
share of restricted Company Stock shall contain a legend giving appropriate
notice of the restrictions in the Grant. The Grantee shall be entitled to have
the legend removed from the stock certificate covering the shares subject to
restrictions when all restrictions on such shares have lapsed. The Committee may
determine that the Company will not issue certificates for shares of restricted
Company Stock until all restrictions on such shares have lapsed, or that the
Company will retain possession of certificates for such shares until all
restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. Unless the
Committee determines otherwise, during the Restriction Period, the Grantee shall
have the right to vote shares of restricted Company Stock and to receive any
dividends or other distributions paid on such shares, subject to any
restrictions deemed appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on
restricted Company Stock shall lapse upon the expiration of the applicable
Restriction Period and the satisfaction of all conditions imposed by the
Committee. The Committee may determine, as to any or all restricted Stock
Grants, that the restrictions shall lapse without regard to any Restriction
Period.
7. Withholding of Taxes
(a) Required Withholding. All Grants under the Plan shall be
subject to applicable federal (including FICA), state and local tax withholding
requirements. The Company may require that the Grantee or other person receiving
or exercising Grants pay to the Company the amount of any federal, state or
local taxes that the Company is required to withhold with respect to such
Grants, or the Company may deduct from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. If the Committee so permits,
a Grantee may elect to satisfy the Company's income tax withholding obligation
with respect to a Grant by having shares withheld up to an amount that does not
exceed the Grantee's minimum applicable withholding tax rate for federal
(including FICA), state and local tax liabilities. The election must be in a
form and manner prescribed by the Committee and shall be subject to the prior
approval of the Committee.
8. Transferability of Grants
(a) Nontransferability of Grants. Except as provided below,
only the Grantee may exercise rights under a Grant during the Grantee's
lifetime. A Grantee may not transfer those rights except by will or by the laws
of descent and distribution or, with respect to Grants other than Incentive
Stock Options, if permitted in any
<PAGE> 6
specific case by the Committee, pursuant to a domestic relations order (as
defined under the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the regulations thereunder). When a Grantee dies, the
personal representative or other person entitled to succeed to the rights of the
Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must
furnish proof satisfactory to the Company of his or her right to receive the
Grant under the Grantee's will or under the applicable laws of descent and
distribution.
(b) Transfer of Nonqualified Stock Options. Notwithstanding
the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee
may transfer Nonqualified Stock Options to family members, one or more trusts
for the benefit of family members, or one or more partnerships of which family
members are the only partners, according to such terms as the Committee may
determine; provided that the Grantee receives no consideration for the transfer
of an Option and the transferred Option shall continue to be subject to the same
terms and conditions as were applicable to the Option immediately before the
transfer.
9. Change of Control of the Company
As used herein, a "Change of Control" shall be deemed to have
occurred if:
(a) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing more than 50% of the voting power of the then outstanding
securities of the Company (other than pursuant to a merger or consolidation of
the Company where the shareholders of the Company, immediately prior to the
merger or consolidation, will beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to more than 50% of all votes
to which all shareholders of the surviving corporation would be entitled in the
election of directors (without consideration of the rights of any class of stock
to elect directors by a separate class vote);
(b) The shareholders of the Company approve (or, if
shareholder approval is not required, the Committee approves) an agreement
providing for (i) the merger or consolidation of the Company with another
corporation where the shareholders of the Company, immediately prior to the
merger or consolidation, will not beneficially own, immediately after the merger
or consolidation, shares entitling such shareholders to more than 50% of all
votes to which all shareholders of the surviving corporation would be entitled
in the election of directors (without consideration of the rights of any class
of stock to elect directors by a separate class vote), (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or (iii) a
liquidation or dissolution of the Company;
(c) Any person has commenced a tender offer or exchange offer
for 30% or more of the voting power of the then outstanding shares of the
Company; or
(d) After the date this Plan is approved by the shareholders
of the Company, directors are elected such that a majority of the members of the
Board shall have been members of the Board for less than two years, unless the
election or nomination for election of each new director who was not a director
at the beginning of such two-year period was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period.
10. Consequences of a Change of Control
(a) Notice and Acceleration. Upon a Change of Control, unless
the Committee determines otherwise, (i) the Company shall provide each Grantee
with outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options shall automatically accelerate and become fully exercisable
and (iii) the restrictions and conditions on all outstanding Stock Grants shall
immediately lapse.
(b) Assumption of Grants. Upon a Change of Control where the
Company is not the surviving corporation (or survives only as a subsidiary of
another corporation), unless the Committee determines otherwise, all outstanding
Options that are not exercised shall be assumed by, or replaced with comparable
options by, the surviving corporation.
<PAGE> 7
(c) Other Alternatives. Notwithstanding the foregoing,
subject to subsection (d) below, in the event of a Change of Control, the
Committee may take one or both of the following actions: the Committee may (i)
require that Grantees surrender their outstanding Options in exchange for a
payment by the Company, in cash or Company Stock as determined by the Committee,
in an amount equal to the amount by which the then Fair Market Value of the
shares of Company Stock subject to the Grantee's unexercised Options exceeds the
Exercise Price of the Options, or (ii) after giving Grantees an opportunity to
exercise their outstanding Options, terminate any or all unexercised Options at
such time as the Committee deems appropriate. Such surrender or termination
shall take place as of the date of the Change of Control or such other date as
the Committee may specify.
(d) Limitations. Notwithstanding anything in the Plan to the
contrary, in the event of a Change of Control, the Committee shall not have the
right to take any actions described in the Plan (including without limitation
actions described in Subsection (c) above) that would make the Change of Control
ineligible for pooling of interests accounting treatment or that would make the
Change of Control ineligible for desired tax treatment if, in the absence of
such right, the Change of Control would qualify for such treatment and the
Company intends to use such treatment with respect to the Change of Control.
11. Requirements for Issuance or Transfer of Shares. No
Company Stock shall be issued or transferred in connection with any Grant
hereunder unless and until all legal requirements applicable to the issuance or
transfer of such Company Stock have been complied with to the satisfaction of
the Committee. The Committee shall have the right to condition any Grant made to
any Grantee hereunder on such Grantee's undertaking in writing to comply with
such restrictions on his or her subsequent disposition of such shares of Company
Stock as the Committee shall deem necessary or advisable as a result of any
applicable law, regulation or official interpretation thereof, and certificates
representing such shares may be legended to reflect any such restrictions.
Certificates representing shares of Company Stock issued or transferred under
the Plan will be subject to such stop-transfer orders and other restrictions as
may be required by applicable laws, regulations and interpretations, including
any requirement that a legend be placed thereon.
12. Amendment and Termination of the Plan
(a) Amendment. The Committee may amend or terminate the Plan
at any time; provided, however, that the Committee shall not amend the Plan
without shareholder approval if such approval is required in order for Incentive
Stock Options granted or to be granted under the Plan to meet the requirements
of section 422 of the Code or such approval is required in order to exempt
compensation under the Plan from the deduction limit under section 162(m) of the
Code.
(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Committee or is extended by the Committee with
the approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A
termination or amendment of the Plan that occurs after a Grant is made shall not
materially impair the rights of a Grantee unless the Grantee consents or unless
the Committee acts under Section 18(b). The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 18(b) or may be amended by agreement of the
Company and the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan shall be
binding upon and enforceable against the Company and its successors and assigns.
(e) Funding of the Plan
This Plan shall be unfunded. The Company shall not be required
to establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
<PAGE> 8
14. Rights of Participants
Nothing in this Plan shall entitle any Employee, Key Advisor,
Non-Employee Director or other person to any claim or right to be granted a
Grant under this Plan. Neither this Plan nor any action taken hereunder shall be
construed as giving any individual any rights to be retained by or in the employ
of the Company or any other employment rights.
15. No Fractional Shares
No fractional shares of Company Stock shall be issued or
delivered pursuant to the Plan or any Grant. The Committee shall determine
whether cash, other awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
16. Headings
Section headings are for reference only. In the event of a
conflict between a title and the content of a Section, the content of the
Section shall control.
17. Effective Date of the Plan. Subject to approval by
the Company's shareholders, the Plan shall be effective on January 28, 1999.
18. Miscellaneous
(a) Grants in Connection with Corporate Transactions and
Otherwise. Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Grants to
employees thereof who become Employees of the Company, or for other proper
corporate purposes, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan. Without limiting the
foregoing, the Committee may make a Grant to an employee of another corporation
who becomes an Employee by reason of a corporate merger, consolidation,
acquisition of stock or property, reorganization or liquidation involving the
Company or any of its subsidiaries in substitution for a stock option or
restricted stock grant made by such corporation. The terms and conditions of the
substitute grants may vary from the terms and conditions required by the Plan
and from those of the substituted stock incentives. The Committee shall
prescribe the provisions of the substitute grants.
(b) Compliance with Law. The Plan, the exercise of Options and
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to persons
subject to section 16 of the Exchange Act, it is the intent of the Company that
the Plan and all transactions under the Plan comply with all applicable
provisions of Rule 16b-3 or its successors under the Exchange Act. In addition,
it is the intent of the Company that the Plan and applicable Grants under the
Plan comply with the applicable provisions of section 162(m) of the Code and
section 422 of the Code. To the extent that any legal requirement of section 16
of the Exchange Act or section 162(m) or 422 of the Code as set forth in the
Plan ceases to be required under section 16 of the Exchange Act or section
162(m) or 422 of the Code, that Plan provision shall cease to apply. The
Committee may revoke any Grant if it is contrary to law or modify a Grant to
bring it into compliance with any valid and mandatory government regulation. The
Committee may also adopt rules regarding the withholding of taxes on payments to
Grantees. The Committee may, in its sole discretion, agree to limit its
authority under this Section.
(c) Governing Law. The validity, construction, interpretation
and effect of the Plan and Grant Instruments issued under the Plan shall be
governed and construed by and determined in accordance with the laws of the
State of Delaware, without giving effect to the conflict of laws provisions
thereof.
<PAGE> 1
EXHIBIT 21.01 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999
SUBSIDIARIES OF AMERIQUEST TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
NAME FEIN DOMICILE STATE
- ---- ---- --------------
<S> <C> <C>
Ameriquest/Kenfil, Inc. 95-3973756 Delaware
AAG, Inc. 95-3873075 California
CG Commercial Funding Corp. 33-0855753 California
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 667
<SECURITIES> 0
<RECEIVABLES> 8,323
<ALLOWANCES> 0
<INVENTORY> 3,565
<CURRENT-ASSETS> 12,874
<PP&E> 961
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,168
<CURRENT-LIABILITIES> 6,999
<BONDS> 0
0
0
<COMMON> 679
<OTHER-SE> 174,433
<TOTAL-LIABILITY-AND-EQUITY> 14,168
<SALES> 56,865
<TOTAL-REVENUES> 56,865
<CGS> 51,990
<TOTAL-COSTS> 6,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (1,909)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,909)
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<NET-INCOME> (1,909)
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